Feb. 18, 2025
How to Save Your Children from a 20% Capital Gains Tax on Your Home (Episode 313
In today’s program, Tom explains how deeding your home to your children during your lifetime can end up costing your children a 20% Capital Gains tax when your home is sold.
In today’s program, Tom explains how deeding your home to your children during your lifetime can end up costing your children a 20% Capital Gains tax when your home is sold.
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Well, good afternoon, Michiganers. It is FEPUWAREYV eighteenth, twenty twenty five,
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and it is frigid outside. Of course, this is Tuesday
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with Tom, Michigan's only weekly internet show where we do
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answer your questions about estate planning and a state settlement
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in Michigan, and we don't send you a bill. I'm
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your host, Tom Doyle, a state planning attorney, lifelong Michigan resident,
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an ambassador for all things good in this great state
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of Michigan. Welcome, Welcome to today's program. Well, the last
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episode talked about whether or not your revocable living trust
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needs a new tax ID number, a question we get
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from clients all the time. So if you have a
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revocable living trust and you're asking yourself, do I need
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to go out and get a new tax ID number?
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I would recommend that you listen to our last episode. Today,
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I'm going to talk about something that frequently comes up
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working with some clients right now, where this essentially came
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up in the conversation when we looked at what the
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clients were considering doing, and that is we're going to
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talk today about how you can save your children from
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a twenty percent capital gains tax on your home. But
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please remember that what I'm i about to discuss during
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the program is, as always for educational purposes. It is
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not intended to be legal advice. You need to work
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with your attorney and your tax advisor to determine what
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is appropriate for you how to save your children from
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a twenty percent capital gains tax on your home. So
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let's say your child comes to you one day and says, hey,
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I think what you should do is you should deed
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your home to me in order to avoid probate when
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you die, or perhaps you're looking at your state and
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you're thinking, wow, why don't I ded the home to
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my child now rather than waiting for them to own
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it until I die. Well, here's what you need to understand.
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If you do that, if you give your home to
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your child before you die, basically what you are doing
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is you are passing on to your child your basis
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in your home, that being what you paid for it,
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plus a number of improvements that you might have made
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for it during the time that you've owned it. But
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essentially you are passing on to your child that basis.
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And what does that mean. Well, it means when they
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sell it. If they make more from the sale than
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the basis and the property, then they are going to
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pay a capital gains tax on the difference between what
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it's sold for and what your basis is in the home.
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And today most for most people, capital gains tax is
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going to map out at twenty percent, depending upon what's
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your income. So let's use an example though. All right,
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Let's say that you have a home that you bought
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a number of years ago twenty thousand dollars. That's a
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long time ago, but it could be that you've owned
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this home for a very long time. And let's say
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the home is worth now, just conservatively, it's worth one
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hundred and twenty thousand. If you give that home to
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your child, what are you doing. You are passing on
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your basis in that home, and in this case, your basis,
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because we haven't factored in any improvements, et cetera, the home,
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your basis is twenty thousand. So if your child turns
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around and sells at home at one day for what
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it's worth today one hundred and twenty thousand dollars, they're
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going to have one hundred thousand dollars capital gain. And
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if you look at twenty percent potentially being the tax
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on that. That's essentially a twenty thousand dollars tax bill
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that you're passing on to your children. Now, why does
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that become important? Well, that becomes important for this reason
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if your child does not own the home until you die,
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whether it's they're going to receive it through probate, maybe
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you have a will, or they're going to receive it
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through a trust, or maybe you're going to use something
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like a Ladybird deede that's going to transfer your interest
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in the home to them when you die, They under
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current federal law, get a stepped up basis. And what
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does that mean? Their basis in that case is what
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is a home worth on the day that you died.
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So in that exact same example, let's say the home's
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worth one hundred and twenty thousand, you die, your child
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receives a home either by virtue of your will or
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a trust or a lady birded, but they don't receive
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it until you have have died. Their basis in this
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example is now going to be one hundred and twenty
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thousand dollars. They sell it for one hundred and twenty
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thousand dollars. Their potential capital gains tax is now zero.
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So if you're thinking about if your child is saying
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to you, hey, why don't you give me the home now?
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Or you're thinking about your estate plan and you want
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to give the child your home, and it doesn't have
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to just be your home. It could be any talk
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about any real estate that you're talking about here, ask
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your child do they does he does she want to
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pay potentially a twenty percent capital gains tax on that home?
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Or would they rather receive the home as part of
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an inheritance and have zero capital gains tax? If in
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the end they say, hey, I would rather inherit the
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property than own it now, maybe maybe you'll even convince
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your child in that case, how about you paying for
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me to have a trust prepared or perhaps a Lady
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Bird deed prepared that will accomplish that. So if you
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have any other questions, any still questions about determining how
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best passed a home to your child without the capital
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gains tax, please reach out to us. And I know
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that's kind of a brief episode, but it's important. It
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was something that has come up in conversations with clients today.
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I hadn't talked about it for several years, so I
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thought I would update you on that discussion. Of course,
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so Aman and I. If you have any questions about
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that making that gift to your child, or if you're
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looking to have an estate plan prepared for you or
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amending a plan that you have, or assisting you in
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settling your state, please reach out to us. Head on
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over to DOYLELOWPC dot com. There you're going to find
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all information on how you can schedule in consultation off
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in consultation at our offices, be that Grand Rapids or
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in Lancing Now, or perhaps a virtual consultation via zoom
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or telephone. Also remember to if you're simply looking for
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an individual document, you will likely find that available in
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our legal store, which again is at DOYLELAWPC dot com.
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But I think realize it's a pretty short show today,
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but I think that's going to be it for today's show.
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But as always, if you have a comment about the program,
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a topic that you'd like to have me discuss, or
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questions that you'd like to have answered, head on over
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to Tuesday with Tom dot com. Leave a voice message
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by clicking on the microphone, or alternatively, send me an
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email that would be Tom at Tuesday with Tom dot
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com and please follow us on Facebook. Invite your friends
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and family to follow us on Facebook. That's going to
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opportunity to sa subscribe to our email there as well.
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But remember two Tuesday with Tom is available on probably
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wherever it is that you normally listen to your podcast
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Apple Podcasts, Spotify, Amazon Music, Google Podcast, iHeartRadio speaker and
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you can always ask your smart speaker to play Tuesday
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with Tom. Well, thank you again for spending some of
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your time with us today and as always, I hope
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that you have an awesome day and an awesome week
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in Michigan. Stay safe and stay warm. Tuesday with Tom
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has been brought to you by the estate planning attorneys
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at Doyle Law PC. To learn how we can help
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you with your estate plan or with settling a loved
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one's estate, please call us today at five one seven
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three two three seven three six six. That's five one
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seven three two three seven, three six six mm hmm
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