Show #404 Airing Sunday 10/21/07
The stock or real estate you bought years ago has gone up nicely in value. But when you sell, the tax may be huge. Or maybe you transfer your home to your kids to protect it from nursing homes; but when they sell, again, there will be a large capital gain tax. Here with "capital" ideas to cut your capital gain taxes on appreciated assets is my law partner who I truly appreciate, Jennifer Peck.
Question: Is there any way to cut this tax on appreciated stock?
Answer: Yes. One strategy is to put it into a child or grandchild's name. If the youngster is 24 or older, he or she can sell it and pay tax at his tax rate. If the child's in school, or just starting work, his tax rate is likely to be very low. Moving appreciated stock to a youngster can save thousands of tax dollars.
Question: How about real estate. Any way to save taxes there?
Answer: Yes. If you sell your home, your primary residence, you don't pay any capital tax on profit (known as capital gain) up to $250,000, and $500,000 for a married couple.
For other real estate, like a rental property, you will pay tax when you sell. But you can do a 1031 exchange, which means you replace the property you had with another one, and you don't pay tax on the exchange (if it's same or more expensive).
Question: What if you're buying a new home, and you can't sell the old home, so you rent it out. When you sell it, do you pay tax since it's no longer your primary residence?
Answer: As long as you sell within three years, you can escape tax when you sell. The rule is that you must have lived in the home 2 of the 5 years before you sell.
Question: If mom dies and leaves appreciated stock or real estate to the kids, will they pay tax when they sell?
Answer: It depends. Let's say mom bought GE stock for $10,000, and today it's worth a lot more. If mom sells, she'll pay some big capital gain taxes. But if she dies and leaves it to her son, he can sell it and pay no tax. The tax gets wiped out at mom's death. Legally, it's called a stepped up basis.
Question: Can a child give appreciated stock to mom, who has cancer, and when mom dies three months later, does the tax get wiped out?
Answer: That depends on who inherits the stock. If the son who gave mom the stock gets it back within a year, then there's no tax saving, and the tax must be paid. But if mom has the stock at least a year before she dies, the tax is eliminated when she dies. And even if mom dies within a year, if a different child or grandchild inherits the stocks the tax is wiped out. This is a little morbid, but it can be a big tax saver.
Usually, you pay tax when you sell stock or real estate for a profit. But Jennifer's given us some very profitable tips. For more information, give Jennifer Peck a call.
