Compliments of Our Law Firm,
By: The American Academy of Estate Planning Attorneys
“There is a magic in that little world, home; it is a mystic circle that surrounds comforts and virtues never known beyond its hallowed limits.” – Robert Southey
If you are like many Americans, your home is not only an emotionally valuable asset for your family, it is also among your most valuable financial assets. Did you know that, in addition to increasing your net worth, your home can provide a variety of tax, estate planning, and asset protection benefits?
For example:
Taxes
The IRS categorizes your home as a capital asset. Normally, when you sell a capital asset, you’re taxed on the profit (or gain) from the sale.
Homeowners get special treatment for capital gains tax purposes. Provided you’ve lived in your home for at least two of the past five years, when you sell the house, the first $250,000 of gain on the home is tax-free. If you are married and file a joint tax return, your tax savings extends to the first $500,000 of gain.
Asset Protection
Your status as a homeowner may give you an added layer of protection from creditors, at least as far as your house is concerned. Depending on where you live, your home may be given varying levels of creditor protection.
For example, when a resident of Texas or Florida (or certain other states) files for bankruptcy protection, the entire value of that person’s home is completely protected from creditors. In other states, filing for bankruptcy means that only part of the equity in a home can be protected from creditors.
Another type of asset protection is called “tenancy-by-entirety.” This type of property ownership is recognized in a number of states and is only available to spouses. When a home is held as tenants-by-entirety, the creditors of one spouse cannot force the sale of the home to seek payment of the spouse’s debt.
Estate Planning
Your home can be the basis for advanced estate planning using strategies like the Qualified Personal Residence Trust, or QPRT. Here’s how a QPRT works:
- You establish the trust for a defined number of years and transfer your home to the trust. During this time, you continue to live in the home rent-free.
- After the term of years expires, ownership of the home transfers to your children or other beneficiaries. At this point, you can keep living in the home as long as you pay rent at market rates.
- The estate planning benefit of the QPRT is the tax savings. Provided you outlive the term of the trust, the home, including the growth in its value, passes to your children or other beneficiaries estate tax-free. Your only potential tax liability is for the gift value of the transfer. Because the home is held in trust for several years before it is transferred to your beneficiaries, the gift is the actuarial value of the remainder interest they will receive at the expiration of the QPRT term. Ordinarily, this is a small percentage of the full value of the property.
Your home is likely to be your family’s most valuable asset, not only emotionally, but also financially. A qualified estate planning attorney can show you how to turn this asset into a wise investment for your family’s future.