Basis of Family Home

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Goodman60
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Joined: Mon Jun 03, 2013 8:53 pm

Basis of Family Home

Post by Goodman60 »

Ok, here's a real world situation I'm trying to help out on. My aunt and uncle bought a house in California about 35 years ago for about $300,000. It's currently worth about $900,000 (not in LA or San Fran; needs $100,000 to $150,000 of updating and repairs, but it's not dilapidated). There is no debt on the house. Uncle died recently, so wife gets a step-up on half the basis, right? (I was surprised that the house is not worth more, but it got an official appraisal as well as three realtors and all agree it's worth about $900,000. From the outside looking in, I thought anyone with 35 year owned California property has at least a five bagger.)

My aunt and uncle have one daughter, their only child, now an adult with a husband and 12 year old child of their own. Everyone has decided that she and family will move in, and Aunt will "add her name" to the house and move to the guest room. Aunt is 78 and in good health. As I said, the house needs repairs that cousin will do, on her own nickel and with some elbow grease, as cousin's husband is handy.

What is the formula that will determine cousin's basis of the house when aunt dies? Will "adding her name" to the deed avoid California probate (I assume so)? Does this require a federal gift tax filing, or is the gift not complete until aunt dies? There is a lawyer involved who has been good so far. But my aunt asked me to review this for her.
bsteiner
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Re: Basis of Family Home

Post by bsteiner »

Goodman60 wrote: Wed Jun 05, 2024 10:27 am Ok, here's a real world situation I'm trying to help out on. My aunt and uncle bought a house in California about 35 years ago for about $300,000. It's currently worth about $900,000 (not in LA or San Fran; needs $100,000 to $150,000 of updating and repairs, but it's not dilapidated). There is no debt on the house. Uncle died recently, so wife gets a step-up on half the basis, right? (I was surprised that the house is not worth more, but it got an official appraisal as well as three realtors and all agree it's worth about $900,000. From the outside looking in, I thought anyone with 35 year owned California property has at least a five bagger.)

My aunt and uncle have one daughter, their only child, now an adult with a husband and 12 year old child of their own. Everyone has decided that she and family will move in, and Aunt will "add her name" to the house and move to the guest room. Aunt is 78 and in good health. As I said, the house needs repairs that cousin will do, on her own nickel and with some elbow grease, as cousin's husband is handy.

What is the formula that will determine cousin's basis of the house when aunt dies? Will "adding her name" to the deed avoid California probate (I assume so)? Does this require a federal gift tax filing, or is the gift not complete until aunt dies? There is a lawyer involved who has been good so far. But my aunt asked me to review this for her.
Was it community property?

Will the daughter be a joint tenant with right of survivorship, a tenant in common, or a remainderperson?
bombcar
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Re: Basis of Family Home

Post by bombcar »

https://www.nolo.com/legal-encyclopedia ... er5-1.html indicates that California allows a "Transfer on Death" deed - which may be better for your aunt in some situations.

There are also issues with medicare in some cases that may need to be considered (see: clawback).

The two things I'd make sure of is that aunt can't get in a situation where she could be forced out by the daughter before death (both to prevent family drama and to make sure that it's not considered a constructive sale) and that the basis is established for the daughter (so that she is not forced out when the aunt dies).

Check also with a tax attorney because you'd like to keep the prop-13 price for tax purposes if at all possible- see https://www.empower.com/the-currency/li ... at-to-know
Dottie57
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Re: Basis of Family Home

Post by Dottie57 »

bombcar wrote: Wed Jun 05, 2024 10:41 am https://www.nolo.com/legal-encyclopedia ... er5-1.html indicates that California allows a "Transfer on Death" deed - which may be better for your aunt in some situations.

There are also issues with medicare in some cases that may need to be considered (see: clawback).

The two things I'd make sure of is that aunt can't get in a situation where she could be forced out by the daughter before death (both to prevent family drama and to make sure that it's not considered a constructive sale) and that the basis is established for the daughter (so that she is not forced out when the aunt dies).

Check also with a tax attorney because you'd like to keep the prop-13 price for tax purposes if at all possible- see https://www.empower.com/the-currency/li ... at-to-know
The clawback s more likely if on medicaid with a nursing home.
Topic Author
Goodman60
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Re: Basis of Family Home

Post by Goodman60 »

bsteiner wrote: Wed Jun 05, 2024 10:34 am
Goodman60 wrote: Wed Jun 05, 2024 10:27 am Ok, here's a real world situation I'm trying to help out on. My aunt and uncle bought a house in California about 35 years ago for about $300,000. It's currently worth about $900,000 (not in LA or San Fran; needs $100,000 to $150,000 of updating and repairs, but it's not dilapidated). There is no debt on the house. Uncle died recently, so wife gets a step-up on half the basis, right? (I was surprised that the house is not worth more, but it got an official appraisal as well as three realtors and all agree it's worth about $900,000. From the outside looking in, I thought anyone with 35 year owned California property has at least a five bagger.)

My aunt and uncle have one daughter, their only child, now an adult with a husband and 12 year old child of their own. Everyone has decided that she and family will move in, and Aunt will "add her name" to the house and move to the guest room. Aunt is 78 and in good health. As I said, the house needs repairs that cousin will do, on her own nickel and with some elbow grease, as cousin's husband is handy.

What is the formula that will determine cousin's basis of the house when aunt dies? Will "adding her name" to the deed avoid California probate (I assume so)? Does this require a federal gift tax filing, or is the gift not complete until aunt dies? There is a lawyer involved who has been good so far. But my aunt asked me to review this for her.
Was it community property?

Will the daughter be a joint tenant with right of survivorship, a tenant in common, or a remainderperson?
I don't know and I don't know. But these are great questions that I will be sure get figured out. Thank you!
LuckyInLife
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Re: Basis of Family Home

Post by LuckyInLife »

If the house was owned as community property, the aunt should get a full step-up in basis, not just half.
Jack FFR1846
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Re: Basis of Family Home

Post by Jack FFR1846 »

If the aunt leaves the house entirely in her own name and names the daughter as the beneficiary in the will, the daughter gets a stepped up basis, so if she decides to sell soon after the aunt's death, the cap gains will be zero and all tax will be zero.

They should be really careful. I know it's "old school assumed" that if you put the kid's name on the house, you'd avoid all kinds of taxes. It's sort of opposite that in reality. We have someone in the family who did that. House was essentially transferred to a daughter with no money exchanged. That daughter sold and the basis was from the 1930's. In her case, the house was so dilapidated that it sold for well under $250k so no tax. The family was very "Don't tell the government nothin'". When the grandfather passed, the entire estate including the house was listed with the court at $21,000. DW inherited from the aunt and we found $75,000 of savings bonds in the safe deposit box.
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toddthebod
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Re: Basis of Family Home

Post by toddthebod »

The house was most likely community property and therefore received a full step up in basis when Uncle died. Putting the daughter's name on the house will prevent her from receiving a full step up in basis when Aunt dies. Much better for Aunt to own the house herself and leave the house to the daughter via TOD or revocable trust.
Carefreeap
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Re: Basis of Family Home

Post by Carefreeap »

Your aunt needs to see an estate attorney to set this plan up. Don't get in the middle of this and DIY it, make a mess a get blamed for it.

As has already been mentioned upthread the basis of the house was likely stepped up to current value when your uncle died. For inheritance and other reasons your aunt should keep title in her own name. Your cousin would then inherit at the then current value. Putting your cousin on as part owner will likely trigger a partial tax reassessment under prop 19.

Additionally, your aunt should consider retitling the property and put it in a living trust. Besides avoiding probate which in CA is no picnic, CA created a loophole that primary homes put in a trust are not subject to a Medicaid clawback.

Again direct your family to work with an estate atty. It will cost a few thousand dollars but much cheaper than cleaning up the mess this could be.

Good luck!
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Weathering
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Re: Basis of Family Home

Post by Weathering »

In CA, prop 13 and prop 19 (if needed) may trump all other tax considerations. Prop 13 (if the daughter can keep the original assessed value intact) would save the daughter many thousands every year.
BirdFood
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Re: Basis of Family Home

Post by BirdFood »

Goodman60 wrote: Wed Jun 05, 2024 10:27 am and Aunt will "add her name" to the house
I don't understand why. Surely Aunt would then lose out on the adjusted basis that she would otherwise get from inheriting the house? Avoiding probate is not a win if it results in paying a ton more taxes. (Really, I'm not at all convinced that avoiding probate is a win in general, but that's related to the specific circumstances of my mother's death. Probate would have been better.)
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CAsage
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Re: Basis of Family Home

Post by CAsage »

Aunt likely has a total reset on the basis as of the date her husband died; CA is a community property state and I would presume that (it's customary). She should get the house retitled "Aunt TOD Daughter" rather than having both names, as that avoids probate and will allow a second step up in cost basis (i.e. no tax) when Aunt dies. Or put the house in Trust in the name of Aunt, with Aunt as first trustee and Daughter as second trustee and beneficiary (see a lawyer, or research). This also protects her in case they have a falling out (unlikely, but there are stories). Probate is unholy hell in CA and to be avoided at all costs (and CA has no estate tax; the Federal limit is pretty high).
I would then consider the gradual investment and improvements by cousin as their "rent", so no money or gifts are exchanged. Could work out quite nicely for all. If you do add Daughter to title, there's a gift tax return (no money due) to file and it will make her cost basis lower. Do look into what Ca offers in the way of property tax value continuation on inheritance, that's worth $$$.
And Nolo Press book by Denis Clifford "Plan Your Estate" has lots of good information. Knowledge is power; even if you hire a lawyer you won't have to spend time asking extraneous questions.
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Topic Author
Goodman60
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Re: Basis of Family Home

Post by Goodman60 »

All of this is good stuff. Aunt is scheduled to see her estate lawyer soon and she will bring all of this. Thanks to everyone who responded.
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