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Don’t Die This Year

Probably you weren’t planning to, but just in case, you’d better think twice because if you do your children might have to pay a lot more to the IRS when they sell the apartment you leave them. I admit it’s not something I’d focused on until a few days ago when a friend, whose husband had been killed in a freak car accident at the start of the year, finally began to address the practical fallout.

“I have to put my son on the stock and lease so if I get hit by a bus the co-op will be his,” she told me.

Mom was on the right track – sort of. But how you pass along the apartment could make a BIG difference in the amount your kids ultimately wind up with when they go to sell.

“If you add your son as a joint tenant, he’ll automatically become the owner when you die. The good news is that he won’t have to go through probate, which takes time and money. The bad news is that odds are it will be considered a gift of half the value of the property, and since it’s above the $10,000 limit, it could be taxable.”

But I’m getting ahead of myself.  Just because you want to add your children (or anyone else) to the stock and lease doesn’t mean the board will let you. I know someone living in a co-op in Chelsea who got married five years ago, and now she and her husband are on the verge of a divorce because all they do is fight over the board’s refusal to make him a joint owner. The board says it’s financial, the couple says it’s personal.

The truth is the board may be doing you a favor if it turns down your request to add your children as joint owners. Why? Because putting your kids on the stock and lease with you gives them a half interest in the apartment with a cost basis  that carries over from you.  Say you originally bought the apartment for $500,000  – your kid’s half will  be valued at $250,000 by Uncle Sam.  Ten years later you die and the co-op is worth $1.5 million. If  your son sells, he’ll have a paper profit of $500,000 on his half interest.($750,000 -$250,000 = $500,000) subject to capital gains tax. The other half would pass by inheritance. (See below.)

In contrast, if your son acquires the entire apartment by inheritance, he gets the benefit of what’s called a stepped up basis that values the apartment on the date of your death – in this example $1.5 million. If he turns around and sells it for $1.5 million there’s no profit – and no tax. He gets to keep the whole enchilada.

So far so good. Except The Law expired this year creating a mess and those geniuses in Washington still haven’t gotten around to renewing it. This means that if you die this year and your kids inherit and then sell, the apartment wouldn’t be valued on the date you died, but the date you bought, in this example at a cost of $500,000.  Thanks to the non-action in Washington, under the law in effect this year, your son would have a cool million profit ($1,500,000 -$500,000 = $1,000,000) and could wind up paying a mountain of tax.  (The current law allows for an increase of up to $1.3 million in the basis of certain assets.)

That’s why you should do whatever it takes to stave off the Grim Reaper – stop smoking, start exercising, eat healthy, drink green tea. At the very least tell your kids to wait till next year to sell the apartment they inherit  By then it’s expected that the Law will be renewed, and even if it’s not, the old law will automatically be reinstated.

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