What taxes will our kids owe when they inherit our vacation home?

Q. My husband and I own a second residence in New Jersey. Our home has increased substantially in value since purchasing in 1980. Is there anyway our heirs can avoid any New Jersey taxes upon our deaths? Does the exit tax apply to inherited real estate?


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A. There are two potential New Jersey taxes for you to be aware of: the inheritance tax and capital gains tax.

New Jersey’s inheritance tax is levied on certain inheritances based on the relationship of the deceased to the heirs.

“If your property is going directly to your children who are ‘Class A’ beneficiaries,” you would avoid the New Jersey inheritance tax,” said Jonathan Donenfeld, a certified public accountant with JLD Tax & Accounting in Jersey City. “If the property was left to siblings of the owner or non-Class A beneficiaries, then it could be subject to the inheritance tax, which ranges from 11% to 16%.”

Next, let’s talk capital gains taxes.

If your children or anyone inherit the property upon your death, they will receive a “stepped up basis” in the property, Donenfeld said.

“What that means is if they went to sell the property, it would be as if they bought it at the fair market value when they inherited the property,” he said. “If your property has appreciated significantly, this could be a big savings when they go to sell the property as a large portion or possibly all of the capital gains tax is eliminated.”

Many people make the mistake of transferring the property to family before they die for a bargain price, or for no money at all, and the person receiving the property does not get the stepped up basis and has to pay a large capital gains tax upon sale, he said.

You should speak to an estate planning attorney to see if there are any tax-saving moves you should make related to the home and your other assets.

Email your questions to [email protected]

Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.


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