Unless you’re a millionaire, the estate tax is not a big problem

  • Steve Tytler / Real Estate Columnist
  • Saturday, October 13, 2001 9:00pm
  • Business

Q: In one of your past columns, you talked about quit-claiming property from one person to another as a means of reducing estate taxes. You said you could give away $10,000 per person, per year. Does this mean I can give my three children $10,000 each, or can I only give away a total of $10,000 per year? – J.S., Snohomish County

A: You can give away $10,000 to each child each year, for a total of $30,000 per year. And if you are married, you and your husband can each give $10,000 to each of your children every year. That would be $20,000 per child per year, for a total gift of $60,000 per year.

Now, why would you want to do that? Because under current tax law, you can leave up to $1 million to your heirs tax-free. Any assets in excess of the $1 million limit are subject to inheritance tax. The $1 million limit is per individual, so you and your husband could leave a combined estate of up to $2 million to your heirs before they would be forced to pay any income tax.

People who have large estates try to reduce the inheritance tax burden on their heirs by giving away as much property as possible prior to their deaths. As long as you do not give away more than $10,000 per person per year, the $1 million estate exemption remains. However, any gifts in excess of the $10,000 limit per year are deducted from your $1 million estate exemption.

For example, if you and your husband gave away $50,000 per child in one year, you would exceed the $10,000 per person gift limit by a total of $90,000 ($30,000 per child). That $90,000 would be deducted from your $1 million estate exemption upon your death. Your heirs would then owe inheritance tax on any assets in your estate in excess of $910,000 ($1 million minus $90,000) upon your death.

In other words, you’d be able to protect fewer assets from inheritance tax upon your death if you give away too many assets per year. That’s why people with large estates start gifting assets to their children long before they near the end of their projected life span.

Q: I bought a piece of property some time ago and moved a mobile home onto it. The property has now appreciated to five or six times its original cost. Do I have to pay income tax on the difference if I sell it? – R.D., Snohomish.

A: You would not have to pay income tax, but you may be subject to a capital gains tax if you sell the property and keep the cash.

For example, let’s assume you bought the land for $20,000 and sold it for $100,000, with $10,000 of selling expenses. Your net sales price would be $90,000 ($100,000 minus $10,000), leaving you with a profit of $70,000 ($90,000 net sales price minus the $20,000 original cost). That $70,000 would be subject to the capital gains tax.

However, if you lived in the mobile home as your primary residence for at least two of the last five years, you could sell the property and keep up to $250,000 in sales profit tax free.

If you used the mobile home as a rental property, you could also avoid paying capital gains tax on the sale profits by rolling the money into another investment property through a tax-deferred exchange. You must follow very specific procedures or the sale proceeds will become taxable.

Briefly, you must identify the replacement property within 45 days of the closing date on the old property, and you must close on the purchase within 180 days. The transaction must be handled through an independent third party called an exchange facilitator because you cannot have access to any of the money during the exchange process.

The procedure is much too complicated to explain here in detail. If you are considering a tax-deferred exchange, please seek professional advice.

Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206. Fax questions to 425-339-3435 or e-mail him at economy@heraldnet.com.

Steve Tytler is a licensed real estate broker and owner of Best Mortgage, Inc. You can visit the Best Mortage Web site at www.bestmortgage.com.

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