On a regular basis, we get calls from aging parents, asking us to prepare a Deed transferring their home to their children. Their theory? It avoids inheritance taxes and the children will get it someday anyway. 9 times out of 10, after we explain the tax ramifications, they change their mind. Nonetheless, we see other attorneys doing it all of the time without having the tax discussion.
While a gift made more than a year before a person’s death does avoid PA Inheritance taxes, it quite often leads to higher overall taxes. That’s because the children assume their parents’ basis in the home when it is gifted to them. Inevitably, because the parents have owned the house for so long, their basis is quite low.
Consequently, when the children sell the property, they incur a Capital Gains tax. While the capital gains tax is 25% and 3% to the IRS and PA respectively (28% total), the Inheritance tax rate is only 4.5%.
Long story short, these gifts usually end up costing the entire family tens of thousands of dollars more than they would have paid, had they gotten good advice. There are far better ways to accomplish the parents’ goal of mitigating taxes.
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