'We Are Blessed': Husband Inheriting $1M Home—Should It Be in My Name?

Understanding the Implications of Inheriting a House and Planning for the Future

Inheriting a house valued at $1 million or more is a significant financial event, especially when it’s in one person’s name and not part of a community-property state. This situation raises several important questions about estate planning, tax implications, and future decisions regarding the property. If you and your husband plan to live in the house for a while to avoid capital-gains tax, there are several factors to consider before making any final decisions.

Estate Planning and Beneficiary Designations

Your husband has expressed a desire to name you as the primary beneficiary in his will, with your son as the contingency. This is a common approach to ensure that your spouse receives the majority of the inheritance if something were to happen to him. However, it’s important to understand the legal implications of this arrangement. If your husband were to pass away before you, your son would inherit the estate only if you predecease him. To avoid potential complications, you might want to explore additional strategies such as creating a revocable trust or using a transfer-on-death (TOD) deed.

A TOD deed allows your husband to retain full ownership of the property during his lifetime while ensuring that it automatically transfers to you upon his death. This can help avoid probate, which is the legal process of distributing assets after someone passes away. Unlike adding your name to the deed, a TOD deed does not require you to be involved in the day-to-day management of the property.

Tax Considerations and Capital Gains

One of the key benefits of inheriting a home is the potential for a step-up in basis. Under Section 1014 of the U.S. tax code, the cost basis of an inherited property is typically adjusted to its fair market value at the time of the previous owner’s death. This means that if you sell the house, you may qualify for a significant reduction in capital-gains tax. For example, if the property was worth $1 million when it was inherited, your cost basis would effectively be $1 million, which could result in a much lower taxable gain if you later sell the home.

If you decide to sell the house, you may also be eligible for the capital-gains exclusion. Single filers can exclude up to $250,000 in gains, while married couples filing jointly can exclude up to $500,000. However, this exclusion applies only if you have lived in the home for at least two out of the five years prior to the sale. If you sell another primary residence within two years of selling the inherited home, you may not qualify for the exclusion.

Another option to consider is converting the home into a rental property. If you later decide to sell, you could use a 1031 exchange to defer capital-gains taxes by reinvesting the proceeds into another qualifying property. This strategy allows you to maintain your investment without immediately paying taxes on the gain.

Living in the Home and Long-Term Plans

Living in the inherited home for a period of time can be a smart financial move, as it helps you meet the residency requirement for the capital-gains exclusion. However, it’s also important to consider your long-term goals. If you plan to eventually sell the home, you should evaluate whether keeping it as a rental or selling it outright makes more sense based on current market conditions and your financial needs.

You also have your own home, which you could choose to sell or rent out. This gives you flexibility in managing your overall real estate portfolio. It’s wise to consult with a qualified attorney or financial advisor to create a comprehensive plan that aligns with your goals and protects your interests.

Final Thoughts

Inheriting a valuable property comes with both opportunities and responsibilities. By understanding the legal and tax implications, you can make informed decisions that protect your family’s financial future. Whether you choose to live in the home, rent it out, or sell it, careful planning can help you maximize the benefits of this inheritance. Always seek professional advice to ensure that your estate plan reflects your wishes and provides security for your loved ones.