Real Estate and the Estate Tax

by Judi Cardello 03/22/2020

Image by Gerd Altmann from Pixabay

If you anticipate that you will inherit an estate at some point or if you plan to leave your estate to an heir, it is important to plan for the potential tax implications of that transfer. The federal estate tax is one aspect to consider. Depending on the value of the estate, some beneficiaries may not have to pay taxes however, those with higher value estates might end up paying a significant sum. It is crucial to plan ahead when it comes to inherited real estate.

What is the Estate Tax?

Estate Tax is assessed based on the current market value of the estate as a whole and is then paid by the estate itself. The tax is collected when assets are transferred to named beneficiaries after a person is deceased. The tax is based on the current market value of the assets being transferred after other debts have been settled or charitable contributions have been made. This tax only applies to estates worth more than $11.58 million based on the current limit established by the federal government in 2020. Estates valued over 11.58 million are subject to a 40% tax. Some states have their own estate tax requirements so there could be additional considerations based on where you live.

The first step to determine how an estate tax might be assessed is to calculate the market value of the estate. In general, this should include financial assets as well as property. For example, if someone receives $8 million in financial assets and an additional $2 million in real estate, the total value is $10 million. The value of the real estate is taken at the current fair market value, not the price at which it was originally purchased. If there is a mortgage or other outstanding debt, those are paid by the estate before the final value of the estate is calculated.

Each estate is entitled to a lifetime financial exemption, in 2020 the exemption is $11.58 million. This means that all estates up to $11.58 million will not receive a federal estate tax bill. For couples, this number is doubled up to $23.16 million. Once the asset value exceeds the established limits, every dollar is subject to the 40% estate tax which can add up quickly.

It's a good idea to work closely with a professional financial advisor when making plans for the future of your estate as there are many details to consider depending on where you live and the particulars of your situation. Ask your real estate agent for local recommendations to get you started.

About the Author
Author

Judi Cardello

A Connecticut native and self-titled household CEO, Judi Cardello is passionate about connecting families with their forever home. She prides herself on being a thoughtful partner and a good listener while delivering results for her clients. Before joining the world of real estate, Judi helped develop, manage and market Cardello Architects with her husband, Robert A. Cardello AIA. Cardello Architects is an established, high-end residential and commercial firm. Located in South Norwalk, CT, RAC provides a full range of architectural services nation-wide. Judi, her husband, and two children have lived in Fairfield for over 19 years and are active members of their neighborhood and school communities. Knowledgeable about public and private schools as well as area amenities, programs, and services, working with Judi means working with a member of the community. She brings her insight, marketing expertise, determination and ambition to Remax Heritage and looks forward to contributing to the success of the organization. Judi has a Bachelors Degree in Marketing and 10 years of experience in marketing and product development with a concentration in international business.