If you have received any inherited or gifted real estate in Florida, you must be confused about what to do with the property and you might come across a few terms like cost basis, set-up, etc. which you have never heard. Read this article to understand the tax consequences and best ways of gifting property.
What is Cost Basis?
The cost basis is the total price paid by the buyer for a real estate purchase. This price is determined for the purpose of capital gain. Capital gain is equal to the difference between the asset’s cost basis and the current market value of the asset. Cost basis is also used to describe the difference between the cash price and the futures price of a given commodity.
The cost basis for real estate may include the following:
- Amount originally invested for purchase
- Commission to brokers
- Any settlement fees
- Any major improvements made to the property
- Other costs such as title insurance
What is a Step-Up in Basis?
When the asset's price is above its original value on the date of the decedent’s death, the cost basis is raised to a higher price. This is done to minimize the capital gains taxes owed if the asset is sold later and reduces the heir’s tax liability.
Capital gains tax is a tax levied upon the profit made from selling an asset.
So, step-up in basis adjusts the value of assets while being transferred from the owner to the heir.
How Is Step-Up in Basis Calculated?
In an inherited asset, a step-up in basis resets the cost basis to its market value on the decedent's death. When the asset is sold at a later stage, the higher new cost basis would be reduced from the price at which the property is sold in order to calculate the capital gains tax liability.
Note - Improvements and additions in the home, rebuilding costs of the home following a disaster (this is common in Florida which is hurricane-prone), and any legal fees related to property ownership can be included in a “step-up in basis”.
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Can a Parent Gift a House to a Child?
A person will need to file a gift tax form if he/she gives anyone other than their spouse property valued at more than $17,000 ($34,000 per couple) in any one year as the Gift tax exemption for the tax year 2023 is $17,000.
Consequences of Gifting house to a Child
- Children are not allowed to take advantage of the step-up in basis.
Gifting a home can result in capital gains taxes for the children. Capital gains tax is a tax levied upon the profit made from selling an asset.
- The parent will not be able to apply for Medicaid Benefits. While applying for Medicaid benefits, a person is required to disclose any assets they have given away in recent years (usually 5 years), known as the look-back period. If a person has given any valuable assets in recent years, it may disqualify them from the Medicaid benefit
