HOW TO Legally Avoid Paying Taxes When You Are Selling Property
What are the potential tax consequences that come into play when your spouse passes or when inheriting property? Well, rules have recently changed and It is crucial you understand the tax implications ahead of time because it could save you a lot of money. Just a quick reminder, though: I'm not an accountant, so it's always a good idea to consult with a professional for personalized advice. Now, let's dive into the tax implications that you might encounter in these scenarios.
When you're dealing with the sale of a capital asset like real estate, there are certain tax considerations that can apply. It's worth noting that this discussion doesn't pertain to the home sale tax exclusion that allows a married couple to claim up to a $500,000 tax-free gain on the sale of their primary residence. This is something different altogether and extends beyond your primary home.
Let's imagine you've owned a property for a significant period of time, perhaps having bought it for $300,000, and now you're looking to sell it for $1,300,000. In this example, there's a sizable gain of $1 million that the IRS would typically want a piece of. However, if your spouse were to pass away, you, as the surviving spouse, would get the advantage of a stepped-up cost basis. This means that the value of the property on the day your spouse passed away becomes your new cost basis. If that stepped-up amount equals $1,300,000 and you sell the property for the same amount, there's effectively no taxable gain.
But what if your spouse passed away a few years back when the property was valued at $1 million? In that case, the $1 million would be the cost basis used for calculating gains when selling the property today at $1,300,000. This would result in a gain of $300,000. Nevertheless, if the property is your primary residence, you might also qualify for the $250,000 home sale tax exclusion, which could potentially be $500,000 if both you and your spouse qualify for it. It's definitely a smart move to discuss these details with your accountant to see how this might apply to your specific situation.
If your intention is to leave your property to your children or other heirs, establishing a trust can be a beneficial strategy. This way, when you and your spouse pass away, your children or heirs can take advantage of the stepped-up cost basis as well. This might allow them to sell the property with minimal or no tax consequences, depending on the new cost basis and the eventual sales price.
If you're curious about how all of this applies to your personal circumstances and you'd like to have a more private conversation, or if you're seeking a referral to a trusted accountant, please don't hesitate to reach out. We're here to provide assistance and help you navigate these complex tax matters.