If you are receiving property from a relative, is it better to receive it as an inheritance, or as a gift? From a tax perspective, this is a no-brainer. The benefits clearly are greater if it is an inheritance. But why? Let’s break it down.

Inherited Homes Have the Perk of a Step-Up in Basis

Let’s say Emily and Greg, a married couple, paid $80,000 for their home 40 years ago. When they both pass, and give the house to their son Tom, the house is worth $580,000. Because Tom receives the house as an inheritance, then the house steps up in basis to $580,000.

This means that if Tom sells the house, the new basis (or original price) is now defined as $580,000. So Tom won’t pay any taxes on the appreciation from the former basis, which would have been taxes on $500,000.

If Tom does decide to sell, he will only pay taxes on an the appreciation of value of the home after he acquired it. So if the value reaches $600,000 at sale time, he will only pay taxes on the $20,000 in appreciation.


Gifted Homes DO NOT Have the Perk of a Step-Up in Basis

There is no such tax benefit if you receive the house as a gift. So in this case, let’s say that Emily and Greg instead decided to give their house to Tom before they died. After Tom’s parents pass away, he still has the house, but decides to sell.

Like the previous scenario, Tom acquires the house when it is worth $580,000. But there was no step-up in basis, so if he sells when the value reaches $600,000, he will pay taxes on the profit of the long-term gain of $520,000. That’s a $500,000 difference!


If You Live in the House as a Principal Residence, You May Get a Tax Benefit

You may still be able to get a tax benefit if a house is gifted to you and you decide to sell it. If you live in the house as your principal residence for at least two of the years in a five year period culminating in the sale, than you can exclude a healthy portion of the profit from taxes. In this case, you would be able to exclude $250,000 for a single filer or $500,000 for a married couple filing joint.


Want to Know More Getting the Maximum Tax Benefits from Real Estate?

Every family’s estate situation is different, and strategies to exercise benefits should be uniquely tailored. When exploring options for the maximum benefit in your estate, a long-term strategy is required. PDM’s tax experts can help advise you on the best course of action. Contact us; with our years of technical experience, advanced training, and cutting edge technology, we are your financial partner.