What Taxes Do I Owe When I Inherit My Dad’s House?

Estate Planning When Near RetirementAfter the last surviving parent passes away, the estate may sell his home. The proceeds are then divided up, pursuant to the directions set out in the will. If children are the heirs, they may split the funds among themselves. However, what are the tax consequences?

nj.com’s recent article asks: “I inherited my father’s home. Do I owe any kind of taxes?”

The article explains that the federal estate and gift tax exemption amount is now $11.4 million. In Illinois, residents are subject to the Illinois Estate Tax if the value of the adjusted gross estate exceeds $4 million. Many residents do not have Estates with a value subject to either the Federal or Illinois Estate Tax.  However, there is also the question of income taxation.

The proceeds from the sale of the house will be subject to income tax. However, it’s unlikely that a person would incur the tax because income tax is paid on the difference between the sales price and the basis of the asset, minus costs of the sale.

“Basis” is generally defined as the purchase price, plus the cost of improvements.

Assets owned by a decedent receive a “step-up” or a “step-down” in basis to the value, as of the date of death.

This means that a sibling inheriting a parent’s home and then selling it would only be taxed on the difference between the sales price and the value at the date of death, less selling costs, assuming the parent owned 100% of the home at the time of his death.

If this difference between date of death and sale values is substantial, the adult child would incur a tax, typically at capital gains rates. However, as a general rule, there’s little or no gain to tax.

Be sure to keep evidence of the date of death value of the parent’s home, in case there’s an income tax audit down the road. If you need help understanding the taxes tied to your inheritance, contact our Midlothian tax planning attorneys at 708-852-0733.

Reference: nj.com (March 11, 2019) “I inherited my father’s home. Do I owe any kind of taxes?”

Why Is the New Tax Law A Good Reason to Retire in Florida?

Florida is looking better every day, thanks to changes in the federal tax code. A newly enacted limitation on the deductibility of state and local taxes (SALT) is motivating people from high-tax states, like Illinois and New York, to explore new ways to reduce their tax exposure. That’s leading them to move to Florida. The change in the federal tax code, combined with Florida not having any personal state income tax, has become a key reason for the relocation of many to the Sunshine State.

The Miami Herald recently reported in the article, “Federal tax changes make the Sunshine State even sunnier,” that since the new tax law went into effect in 2018, many people have been considering relocating to Florida. There is good reason. Under the new rules, taxpayers, generally, can only deduct up to $10,000 of SALT as an itemized deduction, which is just a small part of what’s typically paid in these states.

Establishing Florida as your domicile isn’t that easy. While spending 183 days in Florida will help you become a resident, establishing domicile in a new state requires a bit more legwork. Developing a plan of action is crucial to ensuring a seamless process and avoiding penalty-invoking errors.

Moving your domicile to Florida doesn’t mean you must sever your ties with your former home state. Maintaining secondary residence, spending time with family and other activities can all continue, but must be judged against evidence that supports intent, facts and circumstances:

  • Keep good records, like diaries, monthly shopping and flight records to be able to prove that you’ve spent a minimum of 183 days in your new home state;
  • File a Florida Declaration of Domicile;
  • Buy a home in Florida, file for homestead and relinquish it in your previous home state;
  • Register to vote, get a Florida driver license, transfer your car registration and relinquish these rights in your previous home state;
  • File all federal income tax returns and any other state and governmental items with a primary Florida address;
  • Relocate your primary business activities to Florida, if applicable;
  • Open Florida-based bank accounts and move any safe deposit boxes;
  • Do the majority of your spending activities here, like shopping and charitable giving;
  • Get involved with religious and civic organizations in your new hometown; and
  • Update your estate planning documents.

Another major item when planning a relocation, is the lack of tax on transfers of wealth upon death, like an inheritance, or during life, such as a gift. The same states (like Illinois) that impose large income taxes also often impose inheritance and gift taxes that can tax up to 20% with lower exemption levels than at the federal level. While inheritance and gift taxes at the state level can be imposed on estate and gifts as low as $1,000,000, cumulatively, Florida doesn’t have these taxes.  Currently, the State of Illinois imposes a tax on estate and gifts in excess of $4,000,000.  This means that in high-tax states (like Illinois), estate and gift taxes could be imposed, even if there’s no federal estate tax imposed.

Adhere to the requirements mentioned above, so you aren’t still taxed in your former state. High tax states know they are losing residents, so they are likely to be more vigilant about making sure that newly-declared Florida residents meet all the requirements. Be ready to prove your residency, or face taxes from your previous, high-tax state.

If you are interested in discussing the possibility and benefits of becoming a Florida resident, please give a call to Michael T. Huguelet, P.C.  We have lawyers licensed to practice in the State of Florida; and, who have actually practiced in the State of Florida.  We look forward to helping you make your decision.

Reference: Miami Herald (February 22, 2019) “Federal tax changes make the Sunshine State even sunnier”