NEW YORK -- Three years ago Congress gave homeowners an
extraordinary gift -- the ability to shield from taxation as much as
$500,000 in profit from the sale of a primary residence. But the
gift is of little use to homeowners who wish to continue living in
their homes and leave them to their children when they die.
Such people, estate-planning specialists say, may increase the
likelihood that their estates will be subject to state and federal
inheritance taxes because the property would be included in the
estate of the last spouse to die. Under current law, estates of more
than $675,000 would be subject to such taxes.
The estate-planning specialists say, however, that some
homeowners may be able to take advantage of the capital gains tax
exclusion by using what is called a "sale and leaseback." With such
a transaction, they would sell their primary residence to their
children -- thereby eliminating exposure of the asset to state and
federal estate taxes -- while continuing to live in the property
until they die.
Ralph Engel, a Manhattan estate-planning lawyer, said "it makes
sense for homeowners to take full advantage of the capital gains tax
exclusion whenever possible."
He explained that under current law, an individual who has owned
and lived in a home for at least two of the five years preceding the
sale of the home is allowed to exclude up to $250,000 in profits
from taxes; the exclusion is $500,000 for a married couple. And
since many states follow federal law for capital gains tax purposes,
similar exclusions would likely apply on the state level as well.
For example, Engel said, if a house bought for $200,000 is now
worth $700,000, the owners would have a potential capital gain of
$500,000. If the owners are a married couple who use the house as a
principal residence, he said, they could sell the home without
having to pay federal and, in most cases, state capital gains taxes.
But, says Gary Schatsky, a Manhattan lawyer and financial
adviser, "there are many empty-nesters who have no desire to
downsize. Just the thought of moving could itself be enough to keep
some people from selling." Those who wish to keep their house until
they die, of course, increase the chance that their estate will be
subject to inheritance taxes.
Schatsky explained that under current law, individuals are
allowed to transfer out of their names up to $675,000 to others
during a lifetime -- either as gifts while they are alive or through
their estate -- before being subject to federal gift and estate
taxes. (He added that the amount will increase to $700,000 in 2002
and to $1 million in 2006. He also said that individuals are also
permitted to make gifts of up to $10,000 a year to as many people as
they want without reducing the lifetime exclusion, currently
Accordingly, he said, if the last surviving spouse with the
$700,000 house were to die today, $25,000 of that person's estate,
plus any other assets that the person died owning, would be subject
to state and federal estate taxes. …