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Estate Planning Pitfall: You Sell Real Estate for $1

Someone may have told you a story along these lines: Years ago, my grandfather bought land along the shore in (fill in a desirable resort area) for $1,000. He built a vacation home on the property for $50,000 and his family enjoyed weekends and summers there.

When my grandfather retired, the home and adjoining property were worth $2 million. Then he sold it all to my parents for just $1. So, my parents paid virtually nothing for this $2 million property that was removed from my grandfather’s taxable estate. A genius move, right?

Likely, no. Despite what the storyteller says, there are potentially dire tax consequences to this technique under current federal tax laws. First, the IRS could, and probably will, deem the transfer to be a gift because the parents received it for far less than its fair market value. So, it’s subject to gift tax.

Second, and more significantly, the family forfeits the usual step-up in basis on inherited property. Instead, the property’s basis is what the grandfather paid for it — $1,000 — plus $50,000 in improvements, for an adjusted basis of $51,000. This means the parents are sitting on a whopping taxable gain of $1,949,000 if they sell the property.

Better approach: Don’t be swayed by mythic tales. The tax benefits of a $1 real estate sale are illusory. Presuming that the objective is to keep the property in your family, and that estate tax liability isn’t a factor, from a tax planning perspective it’s generally better for the next generation to inherit the property, thereby taking advantage of the step-up in basis.

About The Authors

A professional headshot of Kristin Matsko in front of windows.

Kristin N. Matsko

Kristin, Co-chair of the firm’s Trusts & Estates Group, counsels individuals and fiduciaries on a wide variety of trusts and estates… Read More

A professional headshot of David Riedel in front of windows.

David T. Riedel

An author and frequent lecturer on estate planning, administration and taxes, David provides responsive, sympathetic and personable counsel to his varied… Read More

A professional headshot of Kathryn Windsor in front of windows.

Kathryn S. Windsor

Kathryn is a member of the firm’s Tax Group and represents clients in a variety of tax law matters. Her practice… Read More

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