Real estate transfers can be done without paying immediate federal taxes by utilizing strategic estate planning tools like trusts, lifetime gift tax exemptions, or inheritance laws.
Utilizing a trust is one way to transfer property while avoiding any real estate transfer tax. When a grantor transfers their property to a revocable trust, there are no immediate property tax consequences, although estate taxes may still be levied at the time of death of the grantor. Property in a revocable trust is reported on the grantor’s personal tax return. However, when a grantor transfers their property to an irrevocable trust, it is removed from their taxable estate, and federal estate taxes will not be owed. The bonus of using a trust to transfer property is that it avoids probate, which can place an extra burden on heirs after a loved one’s passing.
When real property is passed down through a will or trust after the grantor’s death, the beneficiaries receive a “stepped-up” basis. The property’s tax basis resets from the original purchase price to the fair market value at the time of death. If the heirs choose to sell the home immediately, they will pay $0 in capital gains tax.
Available in certain states, including Missouri, a transfer on death (TOD) deed allows the homeowner to retain full ownership during their lifetime but automatically shifts the title to their named beneficiary upon death. This bypasses probate while preserving the stepped-up basis for the heir.
Another way to transfer property without real estate transfer taxes is simply owning property through joint tenancy. When the first of the property owners dies, the remaining owner inherits the property without any additional taxes. This is often the case with the primary residence of a married couple.
It is important to note that gifting property during one’s lifetime may not incur tax consequences for oneself, but the giftee may have to pay hefty capital gains tax if they choose to sell the property.