One question that comes up from time to time in my practice is how should I buy Parents’ Home in Washington State in order to save the most on taxes and costs?
The answer to the question of how to buy parents’ home in Washington state depends on several questions as everybody’s situation is unique. Consulting with a well-informed real estate purchase and sale attorney in your area is advisable to learn about all of your options. Purchasing your parents’ home or that of any other family member whom you may inherit a house from in the long run can be an emotionally charged and financially significant decision. It’s a fantastic way to preserve family history and create a new chapter in your life. However, it’s crucial to understand the potential tax implications to avoid any unpleasant surprises.
Tax Implications of Buying Your Parents’ Home
Capital Gains: In Washington state, there are no state-level capital gains taxes, which is good news for the family member selling the home. However, there are still federal capital gains taxes to consider. Capital gains taxes are levied on the profit you make from selling an asset, such as a home. The amount of tax you owe will depend on how long you held the asset and your income level, but in certain situations, depending on how much capital gains there are, whether you are single or married and if you have lived in the home for 2 out of the last 5 years, you may be exempt from capital gains taxes as part of a sale. For a single person who has lived in the home 2 out of the last 5 years, may exempt up to $250,000 and a married couple may exempt up to $500,000 in profit that is not subject to excise tax.
Excise Tax: In Washington state, excise taxes need to be paid to the state and county in most sale transactions unless there is an applicable exemption that can be applied. These taxes can be 1-2% of the overall sales proceeds of a property that is sold.
What Strategies Can Be Implemented to Reduce Taxes When Buying a Family Members Home?
(1) Transfer Title to the Property Through Estate Planning: If property is not officially sold now and the deed is not transferred, then the sellers/parents can also avoid paying excise tax charged by the city and the state as well as capital gains. When a property is inherited, the cost basis is adjusted to the fair market value of the property as of the date of death of the parent. This means the kids won’t have to pay capital gains taxes on the appreciation that occurred before the property was inherited. To avoid selling the property a transfer on death deed can be recorded to transfer the property automatically upon death, the property can be transferred into a trust naming kids as the beneficiary or the property can be designated to transfer to a child as part of a will.
(2) Rent to Own: In combination with estate planning a purchase and sale agreement can be signed between parents and a child, whereas the agreement has provisions with how rent will be paid towards the purchase of the home. This may be a good solution if the parents don’t need the funds right away or can also be structured with a designate date to refinance or date to pay a lump some in order to complete the transaction.
(3) Seller Financing: Seller financing could make sense if the parents are not in need of a lump sum right away and do want to actually transfer title to the deed now so they are not responsible for future costs of the property including utilities, maintenance, property taxes etc. This could also make sense if kids want to take property subject to a current mortgage or lien on the property allowing them to pay less down or also making payment on a mortgage that may have a lower interest rate. It also allows a lower purchase price to be set to save on excise taxes and a note and deed of trust to be recorded against the property in favor of the parents to allow them to be paid on a monthly basis to support their living expenses moving forward.
Seek Professional Advice: Consulting with a tax advisor, Real Estate Attorney or estate planning attorney can help you develop a comprehensive strategy to minimize your tax liability.
In addition to taxes, there are other financial considerations to keep in mind when buying your parents’ home:
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Fair Market Value: It’s important to have the home appraised to determine its fair market value. This will help ensure you’re paying a fair price for the property and is more important for those who are not looking to sell the price at a discount, but in general estate planning terms and in consideration of other siblings, they want to make sure fair market value is being received by your parents as it may factor in to the parents estate down the road and therefore any potential inheritance. It’s best to address this now, rather than down the road which may complicate things if there is a substantial inheritance.
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Financing: If you’re financing the purchase, you’ll need to qualify for a mortgage. Be sure to shop around for the best interest rates and terms and talk to a lender who may be able to assist with wrap mortgages if needed.
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Closing Costs: Closing costs can add thousands of dollars to the cost of buying a home. Be sure to factor these costs into your budget.
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Emotional Factors: Buying your parents’ home can be an emotional experience. It’s important to communicate openly and honestly with your parents about your expectations and plans.
Conclusion
Buying your parents’ home can be a rewarding experience, but it’s important to plan carefully to minimize your tax liability. By following the strategies outlined above, you can reduce your tax burden and keep more of your hard-earned money. If you are looking to figure out how to structure the sale of a parents home to future beneficiaries in Washington state need assistance or have questions about purchasing real estate give Symmes Law Group a call at 206-682-7975 or contact us to get the counsel you need.
