title transfer with minamum taxes

[BigBillO]

What is the name of your state? Calif.
My sister and I jointly own the family home in San Francisco which is paid for and unimcumbered. She occupies it at will for maintenance, insurance, etc. I don't live in the City and don't intend to.

She will live there until she passes then the house will be sold. If I pass first the house will be sold as a part of her estate.

My question is regarding taxes either one of us will incurr upon the death of the other. The house was put in our names in the mid 70's and the value has increased significantly.

Big Bill O

 

[abezon]

The estate may have to pay taxes if the house has gone up in value enough to give the deceased a taxable estate. How much of the value of the house is included in the deceased's estate depends on contributions & state law. The surviving owner receives a basis step up for whatever portion of the house was included in the estate. Generally, this is 50% of the house, but your mileage may vary.

Any portion of the house not included in the deceased's estate retains the old basis (whatever the person who gave it to you paid for it). Are you & sis itemizing & deducting property taxes each year? If not, you might consider capitalizing the property taxes by filing the appropriate election every year. This adds the property taxes to your basis & reduces your eventual capital gains.

EX: Original owner paid $30,000, then gifted to you & sis. House is now worth $1M. When the first person dies, $500,000 is included in his/her estate. The surviving owner's basis is $500,000 + $15,000. If the survivor sells, s/he pays capital gains taxes on $485,000 of profits. If the surviving owner has lived in the hosue for 2 of the 5 years prior to sale, s/he can exclude a further $250,000 from tax & pay on only $235,000 of capital gains.

If one or both owners elect to capitalize the property taxes each year, they attach the election to their annual returns & add the taxes to their bases. Thus, in 10 years, the house basis might be $30,000 (original purchase) + $40,000 capitalized taxes. Upon the first owner's death, the surviving owner's basis = $500,000 + $15,000 + $20,000 = $535,000. In other words, the survivor can avoid paying taxes on $20,000 of capital gains by capitalizing the property taxes. Tax savings = $1,000 - 3,000.

Clear as mud?