Diane, at age 80, resides in the home she has lived in for nearly 40 years. When she initially purchased the home after her husband’s death, it cost only $25,000; today it’s worth at least $675,000. Diane’s only child, Michael, moved in with Diane several years ago to help out his mother since her advancing age and declining health were making it difficult for her to live alone. Diane, like most people, wants to leave her home to her son upon her death, and has even considered gifting it to him now, while she’s still alive. Diane hasn’t decided whether she wants to move someplace else in the future, so it may be she remains in the home until the end and Michael inherits the home when she passes away. Diane doesn’t know much about taxes, but similar to most people, she wants to reduce them as much as possible, including the capital gains taxes Michael will have to pay on her home whether she gives it to him while she’s alive or as inheritance when she passes away.

What is a Capital Gain?

A capital gain occurs when you sell something (a capital asset) for more than your basis (what you spent to acquire it, including any improvements made over the years in the case of real estate). This happens mostly with investments and real estate. Anyone who sells a capital asset should know that capital gains taxes may apply, but luckily there are some ways to reduce or even eliminate the amount that needs to be paid.