‘We are blessed’: My husband is inheriting a $1 million home. Should he put it in my name too?

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“We plan to live in the house at least for a while to avoid capital-gains tax. We may sell it at some point.” (Photo subjects are models.) - Getty Images

Dear Quentin,

My husband is inheriting a house from elderly friends, in his name only. It’s worth $1 million or more. We do not live in a community-property state. We have one son who is now a young adult. We will consult a lawyer about tax protection and to have new wills made.

We plan to live in the house at least for a while to avoid capital-gains tax. We may sell it at some point. We have our own house, which we could sell or rent. We are blessed. What do you recommend we do?

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He wants to name me as the beneficiary to everything in his will, with our son as the contingency (I’ll do the same for him). I don’t want to have an issue if he dies before me. Should he also add me to the deed once the house is in his name?

Feeling Blessed

Related: ‘Is this a good tax strategy or a sham transaction?’ My mother wants to give me her home. I have a plan to avoid taxes.

Even if he is not planning to file divorce papers, there’s no immediate reason to put your name on the deed. - MarketWatch illustration

Dear Blessed,

The undiplomatic answer: He should not put you on the deed if he is planning, at some point in the not-too-far-off future, on filing divorce papers. However, even if he is not planning to do so, there’s no immediate reason to put your name on the deed.

As you are no doubt aware, regardless of whether you live in a community-property state or an equitable-distribution state, all inheritance is regarded as separate property in the U.S. If your husband died without making a will, intestacy laws in your state would apply.

Your husband could, in order to avoid probate, put your name on a transfer-on-death deed so the house becomes yours upon his death, assuming he predeceases you. It works in the same way as naming a beneficiary on a bank account or insurance policy.

It also means the house would not go through probate — the public accounting of assets and liabilities — because it would transfer to you upon his death. This is an alternative to putting you on the deed. This way, he maintains responsibility for and ownership of the property during his lifetime.

Capital-gains exclusions

Existing law allows for single filers to exclude $250,000 in capital-gains tax; for joint filers, the exclusion is $500,000. The tax rate you would pay, if you owed capital-gains tax, would be based on your income-tax bracket.

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“However, if you sold another primary residence within the two years prior to selling the inherited home turned primary residence, you generally won’t be eligible for this exclusion,” says the Law Office of Daniel A. Hunt, which has offices in Sacramento, Folsom and Roseville, Calif.

“If you want to keep the home but don’t plan to live in it right away, you may decide to turn the property into a rental,” the law firm adds. “If you later decide to sell the home, you could choose to defer paying taxes by conducting a 1031 tax-deferred exchange.”

A 1031 exchange, it explains, “occurs when you sell one investment property and purchase another with the proceeds. If you do not wish to purchase another rental property with the proceeds, then you will be assessed for capital gains tax when you sell the rental property.”

Step-up in basis

In addition to selling the property immediately or deducting the expense of selling it from your capital gains, you could, as you say, move into the house with your husband for two years before selling it.

You will likely benefit from the property’s step-up in basis. Under Section 1014 of the U.S. tax code, the cost basis of property inherited from your husband’s friends would likely be the fair market value at the time of the homeowner’s death.

Your husband does not have to be a biological descendant of the owner to receive a step-up in basis, but the property in question must be included as a part of your husband’s friends’ estate. He would need to be named in the will, a revocable trust or transfer-on-death deed.

He could, if he chose, leave half the $1 million home to you and the other half to your son. But it appears he is happy to leave the entire estate in your hands. This inheritance should help smooth the path for your retirement.

Related: ‘This flies in the face of my morals and ethics’: My father cut my sisters out of his six-figure estate. Should I push back?

Previous columns by Quentin Fottrell:

My husband will inherit $180K. I think we should invest the money. He wants to pay off his $168K mortgage. Who’s right?

‘I’m at a loss’: My boyfriend of nearly 10 years is naming his elderly parents as beneficiaries and giving them power of attorney. Am I right to be upset?

‘We have no prenuptial agreement’: Will my wife be able to take my money if I transfer it to my retirement account?