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Phone: 201-345-3018

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An unusual approach to estate tax planning

Many New Jersey families are interested in ways to reduce their estate tax obligation. While there are a number of ways to reach that goal, some are more creative than others and can benefit multiple members of the same extended family. An example lies in a practice known as upstream gifting, which can have capital gains and estate tax planning benefits for three generations or more within the same family.

Capital gains tax comes into play when a property is sold. The original purchase price is known as the cost basis and is adjusted considering aspects such as real estate appreciation/depreciation. The difference between the cost basis and the sales price of the property is the amount that is subject to capital gains tax. A higher basis means a lower tax obligation.   

However, to avoid paying too much in capital gains taxes, individuals may consider certain options. One such option is upstream gifting, and it occurs when a property owner gifts a piece of real estate to an older relative. At that time, the original owner removes the property from their own taxable estate. The recipient assumes ownership of the property, but his or her cost basis is the market value of the property at the time of transfer, not the original price paid by the gifting relative. When the recipient passes away, he or she can leave the property to another relative, who can benefit from the adjusted cost basis.

In this way, three generations benefit. The original property owner is able to reduce his or her taxable estate. The older relative receives a valuable piece of property to use for the remainder of his or her life. The family member who inherits the home receives a property that has significantly increased in value but is subjected to less capital gains tax if the property is eventually sold. This makes upstream gifting an excellent capital gains and estate tax planning option for many New Jersey families.

Source: marketwatch.com, "5 ways to protect your estate from capital gains taxes", John O. McManus, Dec. 25, 2015

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