Tax Matters

Proofs of residency 

• An affidavit declaring residency

• Voter registration

• Documented length of time spent in the residence

• A bank account

• Church or temple membership

• Driver's license

• Utility bills

• Mailing address on a tax return

• Reference to the domicile/principal residence in a will

Property Taxes

• In Florida, a senior homeowner can take advantage of additional tax exemptions to reduce their property tax

• Deferring or freezing taxes is available to avoid taxing seniors out of their homes.  The state may recover deferred taxes through a property lien due on the sale or death of the homeowner or surviving spouse.

Mortgage Interest Deduction

• The Tax Duts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on a home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer's home that secures the loan.   These types of loans have limited loan amounts and are only used for the primary residence or second homes.

Capital Gains for Heirs

• Basis-Step-Up for Heirs

  • The estate is subject to tax, generally based on the fair market value of the assets at the time of death, not the deceased's basis.  Heirs receive the estate assets with a stepped-up basis of fair market value. at the date of the decedent's death.  This means that if an heir sells an asset received from the estatebefore the asset further appreciates in value, there is no capital gain tax due on the sale.  The stepped-up basis rule applies to real property included in the decedent's gross estate.  In community property states, surviving spouses benefit from a stepped-up basis for both the inherited and their own shares of community property. 

  • The step-up basis rule does not apply to property acquired by the decedent by gift within one year of the date of death when the heir is the original donor or donor's spouse.  The decedent's basis in the property carries over to the heir.

• Capital Gains on a Principal Residence

  • A capital gain of up to $250,000 single or $500,000 married filing jointly is exempt from tax if the property has been owned and used by the taxpayer as a principal residence for at least two years out of the five years before the sale.

  • The exemption does not require a minimum age or require rolling over to a higher-valued property.  It can be claimed repeatedly as long as residency requirements are met.

  • A widowed homeowner can claim the full $500,000 exemption if the sale occurs within two years of the death of the spouse and the surviving spouse has not remarried.

  • Military and Foreign Service personnel on qualified active duty assignments are allowed to suspend the five-year test period for up to 10 years.

  • If the homeowner must sell due to illness or disability (their own or that of a family member for whom they are responsible), job relocation, or specified unforeseen circumstances, a prorated portion of the gain is exempt.

• Gift and Generation Skipping Tax

  • Gifting assets to intended heirs during life, instead of as a bequest, moves assets out of the gross estate.  It also provides the givers the pleasure of making the gift during their lifetime and assures that assets go to particular individuals.  An individual can make an annual gift to another individual, free of gift taxes and reporting, of up to $16,000 per recipient. Each spouse can make gifts of up to that amount, totaling $32,000 per year, to any other person.  When a gift exceeds $16,000, its value is based on the fair market value as of the date of the gift, not on the donor's basis.  This includes an interest in real estate. 

  • Gift tax is paid by the donor if the gift exceeds $15,000, but, in reality, very few donors ever pay a gift tax.  This is because taxable gifts are made during the donor's life. However, a gift tax return must be filed; no tax is payable out of pocket until the cumulative amount of lifetime taxable gifts exceeds the exclusion limit.  Payment of medical expenses or college tuition is not subject to gift tax if payments are made directly to the institutions; these are know as "direct transfers."  The top gift tax is 40%. 

  • Gifts and bequests from grandparents to grandchildren can trigger generation-skipping transfer (GST) tax.  Gifts and bequests made to heirs who are not direct descendants, such as the children of a life partner, can also trigger GST of 40% if the recipient is 37.5 years younger than the donor.

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Payout from a reverse mortgage doesn't impact Social Security or Medicare benefits.  But a recipient of a need-based program, like Medicaid and Supplemental Social Security (SSI), must be careful that the payout does not exceed liquid-asset limits.  Reverse mortgage payouts can impact Medicaid eligibility even though home equity is not a countable asset.  An estate recovery or TEFRA lien placed on a reverse-mortgage property will prevent an heir from selling the home without first reimbursing Medicaid.  Local public benefits of the office or an attorney should be contacted for more information and clarification before taking any action.

Log in to the Social Security Administration:  www.SSA.gov