Q+A: Will My Grandson Get Hit with Capital Gains Taxes If I Leave My Home to Him?

Reader Question:

"I want to leave my house to my grandson because I know how hard it is for young people to buy homes these days. But I'm worried about the tax bill. I bought this house 40 years ago, and it has appreciated significantly. Will he get hit with a huge capital gains tax if I leave it to him?"

Answer:

This is such a generous goal, and we have great news for you (and your grandson). You are right to be concerned about taxes, but the rules are different depending on when you give the house.

If you give him the house while you are alive, he generally takes over your original purchase price (your "tax basis"). If he sells it later, he could owe capital gains tax on all the appreciation that happened while you owned it.

However, if you leave it to him as an inheritance (through a Will or Trust) after you pass away, the house gets what is called a "Step-Up in Basis."

This means the IRS "resets" the value of the house to what it is worth on the day you die, not what you paid for it 40 years ago.

Example:

• You bought the house for $50,000. It is now worth $500,000.

• If he inherits it: His new tax basis is $500,000. If he turns around and sells it for $500,000, his "profit" for tax purposes is $0. He pays no capital gains tax.

By waiting to pass the home on as an inheritance, you are essentially erasing decades of capital gains tax liability for him. It's one of the most powerful tax breaks in the estate planning code.

Contact us at (503) 235-5150 to schedule a consultation and discuss your specific situation. Mention this article when you call, and we'll guide you through a low-pressure next step in education and planning.