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Special Considerations: Real Estate in the Will

A common question for those beginning the estate planning process is, “What happens to my real estate when I pass away?” The answer to this question is largely your choice. You can distribute your real estate however you wish in your Will or Trust. Holding a property until death can also provide tax benefits for your heirs. It is also important to note that in Pennsylvania, if you own real estate as a joint tenant with right of survivorship, the other joint tenants will automatically assume your interest.

If you are leaving your real estate as a specific gift in your Will, this may sound something like, “I leave my house at 555 Lancaster Ave, Anyplace, PA, 17600 to my daughter, Beverly.” This scenario is simple and gives you full control over who takes your real estate, however it may require strategic planning to create equal inheritance opportunity for other beneficiaries.

Or, you might transfer real estate to beneficiaries through your residuary estate. Your residuary estate is everything left in your estate after specific bequests are filled. If you have one residuary beneficiary, it’s easy – this beneficiary gets your real estate. If you have multiple residuary beneficiaries, your real estate could either be sold and the sale proceeds would be distributed to your beneficiaries, or beneficiaries could negotiate amongst each other to decide who takes the house.

To illustrate, if your Will distributes your real estate by residue to your children, Fred and Ginger, in equal shares, then Fred and Ginger might each receive 50% of the sales price. Or, Fred and Ginger could agree that Ginger gets your real estate, while Fred gets other things of agreed upon equal value, like your monetary assets.

But who takes your real estate after your death isn’t the only important consideration. If you leave real estate to beneficiaries at death, they get a big tax advantage called a “stepped-up cost basis.”

When people sell real estate that is not their principal residence, they pay capital gains tax on the difference of the sale price and the original purchase price. This original purchase price is called the “basis.” However, when your real estate passes through your estate plan, the basis “steps up” to the fair market value of your real estate at the date of your death. Your beneficiaries avoid paying income tax on all the gain in value your real estate experienced during your lifetime. This is a strong reason to consider leaving real estate for beneficiaries in your Will or Trust, as opposed to giving it to them while you are still alive.

However, if you choose to sell your home during your lifetime, you still might avoid taxes thanks to the capital gains tax exclusion on primary residences. If you sell a house that serves as your primary residence for at least two years, there is no taxed owed on up to $250,000 in gain for single individuals (or $500,000 for married couples). So as long as your house sells with a gain smaller than $250,000 (or $500,000 if you’re married), it may not matter for tax purposes whether you sell your house during life or leave it in your Will or Trust.