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Capital Gains Taxes

When an asset, such as a house appreciates in value, upon its sale, there can be a capital gain for which taxes will be due. When someone purchases a home, the price that they pay for it is their basis.  If they transfer the house to someone during their lifetime, the Grantee obtains their basis and his or her capital gain upon the sale of the house is the same that the Grantor’s would be.  The only difference is that they may not be able to take advantage of a $250,000.00 capital gains exclusion. When someone inherits a house at the owner's death, they get the benefit of a "step-up in basis" which means that their basis is the fair market value of the house at the time of the death of the owner.  This same step-up in basis can be accomplished by having the grantors of the gift retain a life estate in the house or gifting the house to an irrevocable Trust while maintaining certain powers.   Upon the death of the grantors, estate tax returns must be filed, listing the gifted house as an asset of the estate. Individuals, regardless of age, are able to take up to $250,000.00 in home sale gains, tax-free, provided they used the property as their principal residence for two of the prior five years (married home sellers will be able to exclude up to $500,000.00).  (If a senior has already made use of the $125,000.00 exclusion, he/she will be able to make full use of the new law, provided they have met the residency requirements.)   This exclusion can be used every two years. To receive a free copy of A Simple Guide to Understanding the Complexities of Elder Law – a helpful booklet we distribute to our clients which contains definitions and explanations of some important terms – please contact us.