Our plan was for the surviving spouse to sell it right after the other one passes. That way the basis is stepped up to market value and capital gains are set to zero.
Does that dodge you suggest really work?
I would absolutely advise anyone to consult with a professional before doing anything stupid based on what I post here!
Here's something else worth considering ...
1. Suppose you have two parents living in a home worth about $500,000 that has no mortgage on it.
2. Instead of worrying about "death tax" issues when they pass away, have them sell the house to you while they are still alive (as I suggested before).
3. But instead of selling it for $25,000 and facing the prospect of an IRS audit where you might face a tax problem, have them sell it to you for the full $500,000.
4. Sign them to a lease agreement where they pay you a reasonable -- but above-market -- rent to live there. Let's say that home would fetch $2,500/month on the open market. Charge them $4,000/month. If you're ever scrutinized for it, just make sure the lease includes some kind of concessions that you'd never give to an unknown renter but could easily justify the higher rent -- like the rent has no escalation for five years, you agree to do their grocery shopping for them, you'll change the oil in their cars every few months, and you will invite them to Thanksgiving dinner every year (LOL).
5. So now you basically get them to pay down the $500,000 at the rate of $4,000/month for as long as they live. If they live there for ten years, you've got $480,000 in rental revenue out of it, minus your expenses. And you have the equity in the house, too.
6. Here's where it gets interesting ... Since you are owning the property as a rental, you can probably deduct the full cost of ownership without being subject to the annual cap on state and local taxes. You can also deduct costs of ownership that you wouldn't be able to deduct for your primary residence -- like depreciation, maintenance, etc.
7. When you eventually DO sell the house, you will pay a capital gains tax based on a cost basis of $500,000 (adjusted for depreciation) ... which you would have had to set as the step-up cost basis anyway under the stupid Biden proposal if they left the home for you directly as an inheritance.
Yep. I was going to say the same thing. What about having the children placed on the deed to the home prior to the death of parents?