Saving $80K: Tax-Basis Planning for Michigan Real Estate
Thinking about transferring your real estate property to your kids while you’re alive? While it might seem like a thoughtful gesture, it could unintentionally cost your family tens of thousands of dollars in unnecessary taxes. Tax-basis planning is a crucial aspect of estate planning that can help you avoid these pitfalls and maximize the financial benefits for your heirs.
In this blog, we’ll explain how the step-up in tax basis works, why transferring property during your lifetime may trigger hefty capital gains taxes, and how proper estate planning can save your family thousands.
What Is a Tax Basis and Why Does It Matter?
The tax basis of a property is essentially its original purchase price, adjusted for improvements or depreciation. When you sell the property, the capital gains tax is calculated on the difference between the sale price and the property’s basis.
Example:
If you bought a home for $100,000 and sell it later for $300,000, your taxable capital gain is $200,000 ($300,000 - $100,000).
The tax basis determines the amount of taxable gain—and this is where estate planning can make a big difference.
How Transferring Property During Life Creates a “Carryover Basis”
If you transfer property to your children while you’re alive, they inherit your carryover basis, meaning their tax basis is the same as yours. This can lead to significant capital gains taxes when they eventually sell the property.
Example of a Carryover Basis:
You bought your Michigan home for $100,000.
You transfer it to your child during your lifetime.
Your child inherits your $100,000 basis.
If your child sells the property for $300,000, they’ll pay capital gains taxes on the $200,000 gain.
The result? A hefty tax bill for your child that could have been avoided.
The Tax Advantages of a Step-Up in Basis
When your heirs inherit property after your death, the tax basis is “stepped up” to the property’s fair market value at the time of your death. This dramatically reduces or even eliminates capital gains taxes if they sell the property.
Example of a Step-Up in Basis:
You bought your Michigan home for $100,000.
At the time of your passing, the property is worth $300,000.
Your child inherits the property with a stepped-up basis of $300,000.
If they sell the property for $300,000, there’s no taxable gain—and no capital gains taxes to pay.
The result? Thousands of dollars in tax savings for your family.
Why Proper Estate Planning Can Save Thousands
Avoiding the carryover basis and taking advantage of the step-up in basis requires proper estate planning. Here are some strategies to ensure your property is passed on in the most tax-efficient way:
Keep the Property in Your Name:
Instead of transferring the property during your lifetime, allow your heirs to inherit it through your will or trust.Use a Revocable Living Trust:
Placing your property in a trust can streamline the transfer process while ensuring your heirs still receive the step-up in basis.Plan for Other Taxes:
While Michigan doesn’t impose a state estate tax, federal estate taxes may apply for larger estates. Working with an attorney ensures all tax implications are considered.Communicate with Your Heirs:
Explain the benefits of waiting to inherit the property to prevent well-meaning but costly decisions, such as selling too soon.
How Much Could Your Family Save?
The savings from tax-basis planning depend on your property’s value and how much it appreciates over time. For example:
Property Value at Purchase: $100,000
Value at Death: $400,000
Capital Gains Tax (20% on $300,000 gain): $60,000
By inheriting the property with a step-up in basis, your heirs could save $60,000 or more in taxes—just for that one property. Multiply that by additional properties or assets, and the savings could be enormous.
Take the Next Step to Protect Your Legacy
Tax-basis planning is just one piece of the estate planning puzzle, but it can make a huge financial difference for your family. At our offices in Detroit, Dearborn, and Royal Oak, we help families across Southeast Michigan create estate plans that maximize tax benefits, protect assets, and ensure a smooth transfer to the next generation.
We Make the Process Simple and Convenient