These days, it takes powerful motivations to convince older homeowners to sell their property—and more than half say they’ll never do it.
For those who do sell, the reasons include accessing their home’s equity for healthcare costs, wanting to escape the burdens of upkeep and maintenance, or seeking a quieter life in a warmer climate.
But there is another reason increasingly in play: grown kids who need help.
As the baby boomer generation finally settles into retirement, many of them have children who already have or are planning to have families of their own. And there may not be a more valuable asset to leverage in support of the next generation—and the ones to come—than their homes.
Why some people sell, and some people don’t
Baby boomers collectively hold between $18 trillion and $19 trillion worth of real estate across the country—about double what millennials claim, according to analysis from Realtor.com.®
If you’re part of that generation, and you’re hoping to pass your wealth along with “warm hands” rather than cold, what’s the best way to do it without taking a major tax hit?
“When you're thinking about selling your home, it’s usually because you want to preserve the value of the asset and pass something on to your children. But the way and timing of the sale can carry very different tax consequences,” says Laura Cowan, an estate planning attorney and founder of 2-Hour Lifestyle Lawyer. That’s because how and when you transfer the home—whether during your lifetime or after your death—directly affects how much your heirs may owe the government.
If you give your kids the home while you’re alive, they inherit your original purchase price, which can lead to big capital gains taxes later. If they inherit it after your death, the value gets “stepped up” to market price, often reducing or eliminating those taxes.
“Each situation is different. For instance, if the kids don’t plan to sell the house anytime soon, it might not matter as much right away,” says Cowan. “But generally speaking, the step-up in basis can provide a much better tax outcome.”
Take, for example, a homeowner who bought a median-priced home in 1985 for $82,800. That median-priced home today is likely worth $423,100. While this might sound like a big payday if they sell, depending on their circumstances, as much as $90,000 of the profit could be subject to capital gains tax. However, if the home is inherited after death, that tax may not apply, thanks to the step-up in basis.
This means that, in many cases, it is more tax-advantageous to give with “cold hands,” as creepy as that sounds.
Read more at Realtor.com
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If there is a home that you would like more information about, if you are considering selling a property, or if you have questions about the housing market in your neighborhood, please reach out. We’re here to help.
