The mortgage trick helping over-60s cut thousands from inheritance tax bills (2024)

FAQs

The mortgage trick helping over-60s cut thousands from inheritance tax bills? ›

How can taking out a mortgage limit inheritance tax? In most cases, borrowers taking out mortgages in later life are doing so on a property they own outright. They then gift the money raised from the mortgage to their children and, as long as they do not pass away within the next seven years, the gift is tax-free.

Key takeaways. A deceased person's mortgage becomes the responsibility of the person inheriting the home.

Bequeathing your property

If you want to pass your property to your kids after you pass away, Sullivan says it's generally better to do so through a revocable living trust, which allows you to name children as successor trustees allowing for continuity of property management.

Negative Equity: If the house is underwater, meaning the outstanding balance of the mortgage is more than the property's value, you won't be able to sell it for enough to pay off the loan. Unless you can get the lender to agree to a short sale, you'll still be responsible for the remaining balance.

Inheritance Tax Threshold in Scotland

Any assets that add up to over this value will be subject to the general inheritance tax fee of 40%. Although this figure may seem daunting, there are exemptions to the inheritance tax above £325,000.

Con: Illiquidity limits options and adds risk

This lack of liquidity poses a challenge for heirs, especially if the market experiences a downturn when they plan to sell the home. Unlike stocks or cash, a home isn't easily divisible or sell-able in parts to provide funds as needed—it's an all-or-nothing situation.

Yes, your parents can legally sell you their house for $1. The significance of that $1, however, is mostly symbolic.

If you inherit property or assets, as opposed to cash, you generally don't owe taxes until you sell those assets. These capital gains taxes are then calculated using what's known as a stepped-up cost basis. This means that you pay taxes only on appreciation that occurs after you inherit the property.

How long can a mortgage stay in a deceased person's name? ›

No, a mortgage can't remain under a deceased person's name. When the borrower passes away, the loan won't disappear. Instead, it needs to be paid. After the borrower passes, the responsibility for the mortgage payments immediately falls on the borrower's estate or heirs.

Unless the will explicitly states otherwise, inheriting a house with siblings means that ownership of the property is distributed equally. The siblings can negotiate whether the house will be sold and the profits divided, whether one will buy out the others' shares, or whether ownership will continue to be shared.

Let's clarify your biggest question first – Does capital gains tax apply to inherited property? The answer is yes, but only if you've made a capital gain from the sale of the home. In other words, the home's sale price was higher than the market value (as assessed on the date you inherited the property).

In most cases, an inheritance isn't subject to income taxes. The assets a loved one passes on in an investment or bank account aren't considered taxable income, nor is life insurance. However, you could pay income taxes on the assets in pre-tax accounts.

You can inherit up to $12.92 million in 2023 without paying federal estate taxes due to the estate tax exemption. However, some states have their own inheritance taxes, so you may still owe taxes to your state. Any estate exceeding the above thresholds could be taxed up to 40%.

Mortgage: Federal law requires lenders to allow family members to assume a mortgage if they inherit a property. However, there is no requirement that an inheritor must keep the mortgage. They can pay off the debt, refinance or sell the property.

Yes, family members can assume a mortgage. Federal law requires lenders to allow for such transfers in cases of inheritance, and some lenders might make an exception for transfers between parents and children.

While most mortgages aren't transferable, some lenders might make an exception for transfers between parents and children. You'll need to speak with your lender to see if you're eligible and understand the requirements.

If you're inheriting a house in California, you won't be facing state inheritance tax, a relief for many. The property's value on the day the original owner passed away plays a role. This “stepped-up” basis can reduce capital gains tax if you decide to sell an inherited house.