Purchasing real estate in the United States is a significant life plan for many new immigrants. Particularly, many immigrants wish to transfer the real estate they have purchased in the U.S. to their children, which involves various tax issues. What is the best way to achieve optimal tax savings?
What is the difference between inheritance and gifting?
In the United States, there are two ways to transfer real estate to children: inheritance and gifting. Inheritance occurs when children take over the property after the parents pass away. Generally, the inheritance tax in the U.S. is quite high, so it is important to check if the parents have any remaining lifetime gift tax exemption. If there is any remaining exemption, it can be used to offset part of the estate tax. If the parents are still alive, it is referred to as gifting. Inheritance tax and gift tax are somewhat combined.
Each individual has a lifetime gift tax exemption of $5.43 million (including inheritance tax), so a pair of parents has an exemption of over $10 million. Therefore, as long as the property value is within $10 million and this amount has not been used to offset gift tax previously, there is no need to pay inheritance tax.
Both gift tax and estate tax are paid by the donor.
If the property is gifted by the parents while they are alive, when the children later sell the property given by the parents, they will have to pay taxes on the profits from the sale. However, if it is inherited, the cost basis of the property is calculated based on the market value at the time of the parents' death.
How can children reduce income tax?
Experts suggest that all viewers planning to sell their homes should keep all receipts for home renovations, as these can be included in the property’s cost basis.
The third method: Trusts
In addition to inheritance and gifting, there is a third method: trusts. There are many types of trusts, the most common being the Qualified Personal Residence Trust. Experts suggest that if the property exceeds $10 million or if the parents want to ensure security in their old age, this method is advisable. The trust method also provides protection for the parents, as the property is only entrusted to the children, and the parents still hold the ownership rights to the property. Therefore, they can choose to continue living in the house for a certain period, and the children do not have the right to evict them.
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