Considering selling your home? The infamous $1 transfer of the family home is one of those things that can often plague tax and estate lawyers.
Tongues were wagging this morning after a Zillow update reportedly indicated that former President Donald J. Trump sold Mar-a-Lago for $422 million. As of this writing, the listing on Zillow’s website shows that a 5,061-square-foot residence at 1100 S. Ocean Boulevard in Palm Beach, Florida, was sold on Friday, August 4, 2023. According to the website, it previously changed hands in 1995 for $12,000,000.
It’s not clear if the transfer is legitimate or a hoax—though the latter is quite likely. Hours after the report, Eric Trump released a statement saying, “Mar-a-Lago has not been sold nor will it ever be. This rumor is asinine.”
These kinds of real estate transfers don’t usually make news—and I don’t typically report on them. But what is noteworthy from a tax perspective are the whispers about the cost. “Why,” folks were wondering, “if it went to a family member (as was reported) didn’t he sell it for $1?”
The infamous $1 transfer of the family home is one of those things that can often plague tax and estate lawyers. While there can be legitimate tax planning reasons for making a transfer below fair market value, there are often just as many reasons not to do such a transfer. Here are some key issues to consider when making a transfer of property to family members.Basis
Basis is, at its most simple, the cost that you pay for assets. The actual cost is sometimes called your cost basis.
When it comes to real property, your basis is your cost plus any capital improvements. If you make a capital improvement—a major change that adds permanent value—to your house, that increases your basis. The result is sometimes called the adjusted basis.
To figure out a gain or a loss for federal income tax purposes, you take the price of the asset at disposition—in most cases, the sale price—and subtract the adjusted basis. That difference is your realized gain or loss.
When a person dies, there’s a “step-up” in basis for assets held at death. That means that basis is increased to the fair market value of the asset as of the date of death. This typically happens in proportion to the percentage of ownership—for example, if the deceased owned 50% of a property, that 50% of the property is stepped up in value, while the remaining 50% retains its previous basis.
In contrast, a property that is gifted has “carry-over” basis. That means that the original basis of the asset carries over from one owner to the next.
So, let’s consider the infamous $1 transfer. Let’s assume you bought a house for $200,000 and made no capital improvements. Let’s assume that the house is now worth $500,000.
If you passed away today, your heirs would inherit the home with a basis of $500,000—that means that a sale for $500,000 would result in no capital gains ($500,000 sale price less $500,000 stepped-up basis=$0).
If you made a gift of the property to your heirs before your death, they would carry over your basis of $200,000. If they then sold it for $500,000, the home would be subject to capital gains ($500,000 sale price less $200,000 basis=$300,000 capital gain).
