My brother, sister and I inherited a lake house in Texas from my mother, who passed away in 2017.<\/p>\n
My sister would like to keep it, but my brother isn\u2019t interested in keeping his share, and I would like to sell or transfer my ownership to my sister.<\/p>\n
What would be the most tax-efficient way to sell or transfer ownership to my sister? Are there any other issues to consider with selling\/transferring ownership?<\/p>\n
Mixing Family and Taxes<\/p>\n
The tax provisions here run deeper than the depths of the lake beside your family\u2019s house.<\/p>\n
Wading through the tax code is the relatively simple part. Navigating the family dynamics is where the waters could get choppy.<\/p>\n
First, the taxes.<\/p>\n
This lakefront real estate has surely been growing in value over the last six years, so you must consider the capital gains for any sale that you and your brother are contemplating. <\/p>\n
After your mother\u2019s 2017 death, the house\u2019s cost, for capital gains purposes, reset to its market value at the time of her death \u2014 in tax-code parlance, that\u2019s known as the \u201cstep-up in basis.\u201d Assuming the property has appreciated significantly in value over the years, that could represent a major difference for you and your family.<\/p>\n
Now you have six years of asset appreciation. That time frame includes the pandemic\u2019s turbo boost for home prices. <\/p>\n
Of course, you and your brother could sell your lake house stakes to your sister. That\u2019s assuming she can pay the full amount upfront, and you\u2019re willing to take the full capital-gains tax hit.<\/p>\n
The IRS taxes long-term capital gains at 0%, 15% or 20%, depending on household income. The net investment income tax of 3.8% could also kick in, depending on how much you make.<\/p>\n
The net investment income tax can apply to the sale of investment real estate, and the gains on sales of second homes that aren\u2019t the primary residence, the IRS notes.<\/p>\n
Charitable contributions could help offset that one-time spike, said S. Michelle Jann, director of wealth planning at Goelzer Investment Management in Indianapolis, Ind. <\/p>\n
But that\u2019s assuming you also have the funds and assets to donate, and that it makes sense to itemize your deductions to claim the charitable contributions.<\/p>\n
Creating an installment agreement may be another option for your sister, according to Jann and R. Scott Robertson, a Houston, Texas-based partner at Crowe LLP. <\/p>\n
It can also make the capital-gains tax hit more manageable as the payments are being stretched out over a number of years, but you will need to prepare for multi-year tax planning that comes with an installment plan, they noted.<\/p>\n
Another option is gifting your share of the house to your sister. That does sidestep a capital-gains tax hit, said Robertson, whose specialties include trusts and estates. Of course, it also sidesteps any economic benefit to you.<\/p>\n
If you decide to gift your share, you\u2019ll have to file a gift-tax return, Robertson said. For 2023, the annual gift-tax exclusion is $17,000. But I\u2019ll bet your share is worth more than $17,000.<\/p>\n
The value of your lake-house share counts against your lifetime gift and estate tax exemption, which is $12.9 million as of this year. That\u2019s worth knowing if you have other major gifts and estate planning in your future.<\/p>\n
Congress nearly doubled the lifetime gift and estate tax exemption in 2017 as one part of the Trump-era tax cuts. Without Congressional action, the exemption \u2014 and other major parts of the tax code \u2014 revert to the previous rules beginning in 2026.<\/p>\n
Regardless, make sure there\u2019s a purchase agreement on paper, as well as an independent appraisal, Jann said. Texas doesn\u2019t have state-level income taxes, but there could be state-tax rules that apply, depending where you live. <\/p>\n
Seek out professional tax representation before you proceed.<\/p>\n
You asked what else you should consider. I\u2019d be remiss if I didn\u2019t discuss the implications for your family relationships. When family members talk about money and weighty transactions, things can go south very quickly.<\/p>\n
\u201cTaxes are often the easy part,\u201d Jann said. \u201cThings that are quantitative are often easier than things tied to emotion.\u201d (A dive through MarketWatch\u2019s Moneyist column proves this to be true time and again.)<\/p>\n
This was your mother\u2019s lake house. I can see it being the scene for all kinds of lovely family moments. You all may have sentimental attachments, and expectations for how the house will be used if the transaction goes ahead. Will your family still use it from time to time? Would your sister be OK with that? <\/p>\n
Proceed carefully with both the IRS and your siblings.<\/p>\n