Avoiding inheritance tax

[Cyndi Lees]

I inherited a property in Arizona when my mom passed away last October and I'm finally getting around to figuring out what to do with it. I received the property through a guarantee deed (quick claim) that my parents filed in 2006.

I own my own home in California and I'm still paying a mortgage. If I sell the home in Arizona I can pay off my mortgage and have some left for retirement. I'm 67 years old and I barely make it on SS.

The house in Arizona is paid off so I could rent it out and it would be cash flowing. I'm trying to figure out how much I will owe in taxes if I sell it now or if I sell it after it's been a rental. Will it make a difference? I'm really emotionally attached to the house in Arizona so I'm leaning towards renting it out until I work through the grief however, I need to avoid paying a huge amount of inheritance tax. Any advice would be appreciated and I also could use a referral to a tax professional.

Thank you so much!

[Ken M.]

Quote from @Ned Carey:

@Cyndi Lees as @Ken M. said that sounds like a "life Estate"  I think that makes the transfer to you much simpler. See kens message above

According to https://vjrussolaw.com/life-estates-helpful-or-problematic-p... 

"If the owner of the property is also the life tenant, then the property will be included in their taxable estate and the property will receive a step up in basis to fair market value upon the life tenant’s demise. This step-up in basis can save capital gains taxes on a later sale of the residence.

For example, let’s say mom transfers the home to her daughter while retaining a life estate. If her tax basis in the home is $250,000 and the home is worth $1,000,000 on her demise, the tax basis will step up to $1,000,000 and if sold at that time, there would be no capital gains tax. In my example, the step up could potentially save as much as $200,000 in taxes.

Also, before transferring the property, one should be aware that the initial transfer to the remainder person is subject to gift tax laws for the full amount. For most people, this is not an issue because of the $12,680,000 federal gift and estate tax exemption."

NOTE:

This is me speaking, if you change the status to a rental, the whole scenario may change. So, know what your options are, before declaring it a rental.