estate planning, inheriting a primary residence vs rental

Real Estate Agent · Livermore, CA · Member since 2016 · 173 posts · 74 votes

I have a family member who recently had an accident leaving them in need of long term, full time, medical care. I've been exploring options on how pay for this expense and renting out their home seems to be a good financial option at this time. If the home becomes a rental how will that affect the eventual heirs?

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Ashish AcharyaBusiness Member

CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes

Originally posted by @Maria D'Aura:

The activity of the asset will not impact the inheritance.

I think your concern here should be a depletion of the asset. Do you think the asset might be used up to pay or sustain his/her life.

Does the patient have living will, Durable power of attorney, and such basic estate planning document ?

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
7y
Originally posted by @Maria D'Aura:

I have a family member who recently had an accident leaving them in need of long term, full time, medical care. I've been exploring options on how pay for this expense and renting out their home seems to be a good financial option at this time. If the home becomes a rental how will that affect the eventual heirs?
The activity of the asset will not impact the inheritance.
I think your concern here should be a depletion of the asset. Do you think the asset might be used up to pay or sustain his/her life.
Does the patient have living will, Durable power of attorney, and such basic estate planning document ?
[email protected]941-914-7779
INVESTOR FRIENDLY CPA®5241 Reviews
Website View Page
TaxMD™ | AI-Powered Tax Planning
Website View Page
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
7y
Most primary homes are too nice to make good rentals. The return on equity is low and damage too costly if you don't screen well.
If a nicer place I would explore selling it and taking the (probably mostly) tax-free gain and invest or otherwise use the proceeds for their benefit.
As Ashish points out, heirs would inherit the house at it's current value at death whether it's a rental or not. Good luck helping your family member!
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Maria D'Aura
OP
Real Estate Agent · Livermore, CA · Member since 2016 · 173 posts · 74 votes
7y
There is concern about depletion of the asset which is why renting it is the avenue of choice. I just wanted to consider the end result if that changed anything in the long run. I think selling it could use up the funds needed for long term care where renting has a better potential to provide for the long haul.
Thank you for your reply.

Originally posted by @Ashish Acharya:

Originally posted by @Maria D'Aura:
I have a family member who recently had an accident leaving them in need of long term, full time, medical care. I've been exploring options on how pay for this expense and renting out their home seems to be a good financial option at this time. If the home becomes a rental how will that affect the eventual heirs?
The activity of the asset will not impact the inheritance.
I think your concern here should be a depletion of the asset. Do you think the asset might be used up to pay or sustain his/her life.
Does the patient have living will, Durable power of attorney, and such basic estate planning document ?
0 Reply
Maria D'Aura
OP
Real Estate Agent · Livermore, CA · Member since 2016 · 173 posts · 74 votes
7y
Thanks for your reply. This home will need some updates to be able to rent it. It has some deferred maintenance. Why would selling provide "probably mostly" tax-free gain? I'm pretty certain a large % would need to be paid in capital gains. Is there something I'm not considering?

Originally posted by @Steve Vaughan:

Most primary homes are too nice to make good rentals. The return on equity is low and damage too costly if you don't screen well.
If a nicer place I would explore selling it and taking the (probably mostly) tax-free gain and invest or otherwise use the proceeds for their benefit.
As Ashish points out, heirs would inherit the house at it's current value at death whether it's a rental or not. Good luck helping your family member!
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Maria D'Aura
OP
Real Estate Agent · Livermore, CA · Member since 2016 · 173 posts · 74 votes
7y
Originally posted by @Ashish Acharya:

and yes, there is basic estate planning in place.
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Andre Debs
Westchester, NY · Member since 2018 · 38 posts · 52 votes
7y
you don’t have to pay a capital gains tax when selling a primary residence on the first $250,000 of profit, or $500,000 if married.

Originally posted by @Maria D'Aura:

Thanks for your reply. This home will need some updates to be able to rent it. It has some deferred maintenance. Why would selling provide "probably mostly" tax-free gain? I'm pretty certain a large % would need to be paid in capital gains. Is there something I'm not considering?

Originally posted by @Steve Vaughan:
Most primary homes are too nice to make good rentals. The return on equity is low and damage too costly if you don't screen well.
If a nicer place I would explore selling it and taking the (probably mostly) tax-free gain and invest or otherwise use the proceeds for their benefit.
As Ashish points out, heirs would inherit the house at it's current value at death whether it's a rental or not. Good luck helping your family member!
0 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
7y
Originally posted by @Maria D'Aura:
Why would selling provide "probably mostly" tax-free gain? I'm pretty certain a large % would need to be paid in capital gains. Is there something I'm not considering?

Originally posted by @Steve Vaughan:

Most primary homes are too nice to make good rentals. The return on equity is low and damage too costly if you don't screen well.
If a nicer place I would explore selling it and taking the (probably mostly) tax-free gain and invest or otherwise use the proceeds for their benefit.
As Ashish points out, heirs would inherit the house at it's current value at death whether it's a rental or not. Good luck helping your family member!
If it's been their primary residence for at least 2 of the previous 5 years, capital gains should be excluded from tax up to a gain of $250k If single, $500k if married. Ashish can verify that better than I, but that's the gist of the law.
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Maria D'Aura
OP
Real Estate Agent · Livermore, CA · Member since 2016 · 173 posts · 74 votes
7y
Thanks. Yes, this I'm aware of. The home was originally purchased in the mid 1950's and is located in Silicon Valley. The $250/$500K exemption doesn't even come close to making a dent.

Originally posted by @Andre Debs:

you don’t have to pay a capital gains tax when selling a primary residence on the first $250,000 of profit, or $500,000 if married.

Originally posted by @Maria D'Aura:
Thanks for your reply. This home will need some updates to be able to rent it. It has some deferred maintenance. Why would selling provide "probably mostly" tax-free gain? I'm pretty certain a large % would need to be paid in capital gains. Is there something I'm not considering?

Originally posted by @Steve Vaughan:

Most primary homes are too nice to make good rentals. The return on equity is low and damage too costly if you don't screen well.
If a nicer place I would explore selling it and taking the (probably mostly) tax-free gain and invest or otherwise use the proceeds for their benefit.
As Ashish points out, heirs would inherit the house at it's current value at death whether it's a rental or not. Good luck helping your family member!
0 Reply
Andre Debs
Westchester, NY · Member since 2018 · 38 posts · 52 votes
7y
Another option I believe would be a 1031 exchange which potentially defer all capital gains taxes BUT it would need to be an investment property first, ie, rent it out for a while, and you would need to use the proceeds to buy new investment property which I’m not sure if you’d be looking to do that.

Originally posted by @Maria D'Aura:

Thanks. Yes, this I'm aware of. The home was originally purchased in the mid 1950's and is located in Silicon Valley. The $250/$500K exemption doesn't even come close to making a dent.

Originally posted by @Andre Debs:
you don’t have to pay a capital gains tax when selling a primary residence on the first $250,000 of profit, or $500,000 if married.

Originally posted by @Maria D'Aura:

Thanks for your reply. This home will need some updates to be able to rent it. It has some deferred maintenance. Why would selling provide "probably mostly" tax-free gain? I'm pretty certain a large % would need to be paid in capital gains. Is there something I'm not considering?

Originally posted by @Steve Vaughan:
Most primary homes are too nice to make good rentals. The return on equity is low and damage too costly if you don't screen well.
If a nicer place I would explore selling it and taking the (probably mostly) tax-free gain and invest or otherwise use the proceeds for their benefit.
As Ashish points out, heirs would inherit the house at it's current value at death whether it's a rental or not. Good luck helping your family member!
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