Do I have to pay capital gains tax on inherited property or does Enhanced Life Estate deed protect?
Full Question:
Answer:
You did not indicate whether your companion is still living or not, but we are assuming he/she is alive. If he/she is deceased, then a Lady Bird deed option would not be available since he/she cannot execute one.
Inheritance is a taxable event which means it is the time that the tax basis is adjusted for the property. The value at the time of inheritance would have to be established so that if the property is sold at a later date for more than its value at the time of inheritance, capital gains tax would be owed on the difference. A formal appraisal or at leasat a real estate broker's opinion letter is best to establish current value.
When you did decide to sell, your taxable capital gains would be based on the last value prior to transfer of ownership due to inheritance and the amount of the sale. For example:
The inherited property was last accessed a value in 1945 at $25,000. You inherit the property in 2011 and there is no appraisal. You sell the property in 2012 for $160,000. The capital gains could be $135,000. If you would have had an appraisal done at the time of probate in 2011 the value would have been much closer to the sales price. For instance $145,000. Capital gains would only be $15,000 in this case and you would have documented proof.
A "Lady Bird" deed is a nickname for an enhanced life state deed. It is named after Lady Bird Johnson, because allegedly President Johnson once used this type of deed to convey some land to Lady Bird.
An enhanced life estate deed is a variation of a quitclaim deed that currently enables an individual to retain their homestead creditor and tax exemption, have the home be exempt from Medicaid claims during their lifetime, while at the same time enable named persons to receive the home upon death, free of Medicaid claims and liens. It is a specially designed instrument that is only available in a few states, including Florida.
Generally, it works like a traditional Life Estate Deed, and there is often no capital gains tax if the property is sold shortly after your death. It goes beyond a life estate deed, because not only does the life tenant get to live there for life, that former owner also reserves more than just a life estate. Also reserved are the rights to sell, commit waste, and almost everything else, except the transfer on death to the "remainderman."
The Florida Enhanced Life Estate Deed is an invaluable alternative that provides the benefits of the traditional Life Estate Deed and, furthermore, allows an individual to retain control of his/her homestead during his/her lifetime. As such, with the Florida Enhanced Life Estate Deed, an individual can bypass probate, possibly avoid capital gains tax when the property is sold, protect it from claims of the beneficiaries’ creditors during his/her lifetime (except federal tax liens), and, most importantly, retain the authority to sell, mortgage, convey, gift or cancel the remainder interest in the property at any time prior to his death. If there is a property interest left upon the individual’s death, the remainder will pass to the named beneficiaries.
