Kaplin Stewart

Wise gifting can reduce both capital gains and estate tax

With the right attention to detail, Pennsylvania families can save a great deal on taxes. This is true in regard to income taxes, and also other types of taxation. The creative use of gifting can help multiple generations avoid excessive capital gains and estate tax burdens.

This form of gifting is sometimes referred to as “upstream gifting.” It involves making a gift of real estate to an older relative. This effectively removes the property from the estate of the original owner, which can reduce estate taxes. It can also reduce capital gains tax for the party that will eventually inherit the property from the older relative.

When a property is sold, capital gains tax is calculated on the difference between the original purchase price (the “cost basis”) and the final sales price. The higher the basis, the lower the taxes. Basis can be increased by making improvement to the property, but inheritance is an even more powerful tool. When a person passes away, the current market price of the property becomes the new cost basis, and the individual who inherits the property also inherits that “stepped up” basis.

So, by gifting property to an older relative, the piece of real estate is removed from the original owner’s estate, thereby saving on estate tax. When the recipient passes away, the property can be handed back down to Pennsylvania family members. They will receive the stepped up cost basis, which will reduce their capital gains tax burden if and when the property is sold. In this way, everyone can benefit, which is a great estate planning outcome.   

Source: marketwatch.com, “5 ways to protect your estate from capital gains taxes“, John O. McManus, Dec. 25, 2015