Avoiding Taxes on Inherited Home

Reader Question:  When a couple’s home is inherited by their children, and the children then sell the home, does the home sale qualify for the tax exemption allowance on the profit without the children meeting the residency requirements (owned and lived in home as primary residence for two out of the previous five years) …assuming the parents had met those requirements prior to their death?  S.J.

Answer:  This happens a lot.  Parents die and their will leaves everything, including the home, to their children.  In many cases, the parents have lived in the home for decades and it has appreciated in value significantly from what the parents paid for it originally.  In this situation, the exemption on profits does not apply but it is also unnecessary.  At death, assets held in one’s estate receive a “stepped-up cost basis”…meaning that the property value is re-set to the fair market value as of the date of death.  If you continue to hold the property beyond the date of death and it appreciates in value, you’ll owe long-term capital gains taxes on the sale unless you subsequently meet “2 out of 5” test.

Reader Question:  I am approaching 66 and my wife is 63, and we are both currently employed full-time. I plan to keep working past 66 as I was out of work for several years and hope to make up for lost income and retirement savings. I have read about different strategies for maximizing Social security benefits when both spouses are working and have approximately the same lifetime earnings history, and thus similar estimated Social Security benefits. If I file and suspend, so that my wife can receive half my monthly benefit while I continue working, then for tax purposes will the Social Security be treated as mine (full retirement age) or will it be taxed because my wife is the recipient and she is 63 and has earned income? Also, I understand there may be a better option than file and suspend for a couple whose earnings history is about the same.  H.N.

Answer:  Here are the recommendations from my partner, Hugh Smith, CPA, CFA, CFP®: “Once your wife turns age 66 (her full retirement age), you can then file for your Social Security benefits and your wife files for a spousal benefit on your record.  You then immediately “suspend” your Social Security until you’re age 70 so that you receive the maximum delayed credits. At your wife’s age 70, she then switches to her own benefit (versus a spousal benefit) and she will now also receive the maximum delayed credits for her lifetime. Remember, at the first of you to die, the survivor will receive the greater of their own benefits or the survivor’s full benefits.  Note that the younger spouse must be at full retirement age for this strategy to work.

As you can see, this is pretty complicated and does not weigh all the factors that should be considered.  For example, you should carefully assess the health of both spouses.  If both are in good health and have a family history of longevity, delaying for maximum benefits makes sense. When you need to have an organizing storage unit space, visit hollowaystorage for more information.  If one or both has poor health or poor family health history, this may lean you towards taking benefits sooner.  Consider consulting with a professional before making a decision of this magnitude.