Q. Most of my net worth is in my home. What’s the best way to leave it to my kids? Should I have them sell it after I’m dead? Or does it make more sense to downsize or start renting and put the house money in an account somewhere?
— Homeowner

A. It’s admirable that you’re trying to look out for your children.

But you shouldn’t consider downsizing just for the purpose of their inheritance. Put your own welfare first, and decide if you want to downsize or if you want to spend the rest of your retirement years in your current home. Also look at your own budget and decide if you can afford to maintain your home, or if it would be more affordable for you to downsize.

If you really don’t have a preference, then — and only then — should you consider the ramifications of still owning the home when you die.

Ignoring the possible high costs associated with home ownership, generally, if your home has significantly increased in value — by more than $500,000 — you may want to keep it, said Dean Shah, a certified financial planner with Stonegate Wealth Management in Oakland.

“You would owe no tax on the sale unless you sell your home for at least $500,000 more than your cost basis — original purchase price plus capital improvements,” Shah said. “That figure is $250,000 if you’re single.”

Shah said if you retain the home until your death, your children will receive a step up in basisat your death.

“Therefore if they sell the home, their cost basis will be the date of death value of the home, so if you do have a gain larger that the thresholds mentioned earlier, they will still not owe any capital gains tax if they sell it soon after your death,” Shah said.

Shah said even if your house has not increased in value enough since purchase to exceed the thresholds mentioned above, it may still be best to consider downsizing.

“This is especially the case if you anticipate having high estate taxes or large debts at your death,” he said. “Depending on the size and complexity of your estate, your children may not have immediate access to cash.”

If they have to sell the home as soon as possible, they could pressure be pressured into accepting an unfair/low offer, just because a buyer was there at the right time, Shah said.

You should also ask your children if they’d want to keep the home.

If the answer is no, and you don’t have a gain on the home that would trigger a large tax bill, I would consider selling the home now, said Chip Wieczorek, a certified financial planner with Tradition Capital Management in Summit.

“You can downsize and gift the excess proceeds from the sale of the house to your children immediately and not have to worry about complex planning,” he said.

He said if your children want the house and you plan to live there until you die, and your estate is below the unified federal estate gift and estate tax exemption amount of $5.45 million for 2016), then just stay put, Wieczorek said.

“Your children will escape capital gains tax on the appreciation that occurs up to that date and will owe no federal estate tax,” he said. “They are free to move into the house, or sell it and keep the cash. If your children do move into the house, their tax basis will be the home’s fair market value at the time of your death.”

If you plan to live there until you die, and your estate is above the unified federal estate gift and estate tax exemption amount, Wieczorek said you may want to consider a qualified personal residence trust (QPRT).

Using a QPRT can allow you to get the residence out of your estate without moving out, even though you have not made a full fair market value sale to your child.

“This strategy would require the parent to put her home into an irrevocable trust for several years, while she continues to live in it,” he said. “The QPRT value is based on the value of the home and the value of the right to live in the home for a certain period of time based on an IRS calculation.”

After the term of the QPRT expires, you must pay rent to your children, he said. In addition, you must outlive the term of the trust of the value of the home is included in your gross estate.

With so many moving parts, you should consider meeting with a financial advisor who can discuss your goals and the specifics of your finances. Or consider a free money makeover with NJMoneyHelp.com.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.

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