Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: I own a home in Westchester, New York, worth $2 million and I'm in the process of revising my estate plans. How do the changes to the estate tax impact my current plans to pass along the home to my daughter?
A: Under the new law, the federal estate and gift tax has been doubled to $11.2 million per person or $22.4 million for couples. That’s the amount that can be given without being charged federal taxes.
New York has its own estate tax exemption, which is $5.25 million.
So if the property is worth $2 million, it will be applied to the New York and federal exemptions, said Michael Markhoff of Danziger & Markhoff in White Plains, New York. The rest of the estate could be worth up to $9.2 million and federal taxes would still not be taken. But if the estate is worth more than $11.2 million, that could mean taxes.
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Anthony J. Enea of Enea, Scanlan & Sirignano, also in White Plains added that the new increase in the allowance was significant, and is likely to help, not hurt, homeowners’ estate plans.
But if the estate is worth more than the newly doubled exclusion, it might be a good idea gifting the home now so it won’t count toward the exclusion and be subject to tax. If the estate is not worth that much, plans for passing the property along probably won’t change.
The real issue, Mr. Markhoff said, is whether to gift now or let your beneficiary inherit and avoid capital gains taxes.
If the home was purchased for $500,000, that is its cost basis, or the amount used to determine a loss or gain on the property. When the now-$2 million property is gifted to an heir, she will get a carry-over basis, meaning she will be taxed on the additional $1.5 million value of the home.
When the home is left to an heir after death, however, there is a "step up" in the cost basis and therefore no capital gains tax. "If the estate is under the New York and federal thresholds, giving it now should not make it better because of the step up," Mr. Markhoff said.
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On the other hand, if the value of the estate is expected to go up, it may be worth it to gift the property now, Mr. Markhoff said. Reducing the size of the estate now could save on taxes later, should it grow to an amount over $11.2 million.
"It’s a balance between gifting and getting the growth [out of the estate], or not gifting and getting the step-up," he said.
Mr. Markhoff said it’s "an optimal time" to review estate plans to make sure there’s no "inequity in the plan" caused by the new law. Keep in mind that the higher estate tax threshold is temporary and is set to expire in 2025 with the lowered tax rates.
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Correction: This article was updated at 1 p.m. on Jan. 18, 2018 to reflect new information.