Legal Question in Real Estate Law in California

Re: Inherting a house

[not proof read] You may be mixing several concepts together. When one owner of a property dies, the people who receive that owner's share of the property get it with the federal tax basis increased to the fair market value of the property upon the date of that death. So if the house appreciates a lot until the time of your parents' death, if you inherit the house and sell it the next day you pay nothing in taxes. If the value of the house, however, exceeds the estate tax exemption, the estate has to pay taxes at a fairly high rate [you still take with a basis of the fair market value].

If your parents sell the house and they lived in it as their principal residence two of the last five years, their is a $250,000 exemption per parent on the profit from the sale. Your parents could then buy another house, as they have to live somewhere, at a much cheaper price [if they are willing to reduce their standard of residence] and you could inherit that house and then can spend the $500,000 profit for themselves during their lifetime.

If you are listed on the deed as an owner, then your portion of the houe does not take a stepped basis. You probably could quit claim your interest in the house back to your parents to restore fully the prior ownership relationship that existed before your name was added. If the IRS should ever ask, you just honestly tell them that everything was done as part of a tax planning program and you found out later that parts of it were erronous so it was reformed. It is not illegal to engage in tax planning as opposed to tax avoidence by non-premitted methods.

In general, most estate planners tell parent's not to put their children on the deed as many things can happen. If you die first, they then inherit your portion and your estate might be taxed. If you marry a woman they hate who already has children, when you die part of their house goes to the children from a woman they hate and not their blood grandchildren. Or you could become estranged from your parents.

If it sounds comlicated, that is because it is. You need to figure out what all the possible results are, what everyone really wants, how to reduce taxes the most, how to avoid probate, etc. If you are speaking about a house worth several hundred thousands, spent some money going to an estate planner to figure out the options and what is best for your parents.

Re: Inherting a house

There are many different considerations why one might want to have one way or the other. But to avoid the income tax on the sale of the property on gain, one might consider having you deed it back to your parents.