Florida real estate is not just a sunny lifestyle choice—it’s also a powerful investment. But when it comes to passing on your property, the how and when can have a major impact on your family’s tax liability. Whether you’re thinking about gifting your property now or leaving it to loved ones in your estate, understanding capital gains and the step-up in basis is essential.
Here’s what every property owner in Florida (or anywhere, really) should know.
Capital Gains and Cost Basis: A Quick Primer
When you sell an asset like real estate, you may owe capital gains tax on the profit—the difference between what you sell it for and what you originally paid for it. That “original value” is called your cost basis.
For example:
- You bought a property for $200,000.
- Years later, you sell it for $600,000.
- Your capital gain is $400,000 (minus any improvements or deductions), and that’s what could be taxed.
If your heirs end up selling a property, what they pay in taxes depends entirely on what their cost basis is—which is why gifting vs. inheriting matters so much.
Gifting Property During Your Lifetime
Gifting a property while you’re still alive may seem like a generous and forward-thinking move, but there’s a hidden tax consequence many people overlook: the carryover basis.
When you gift a property, your cost basis carries over to the recipient. That means:
- If you bought a home decades ago for a low price, that low cost basis transfers along with the property.
- When the person you gifted it to later sells it, they could owe capital gains tax on the full amount of appreciation—potentially a hefty sum.
Example:
You gift a property you bought for $150,000 that’s now worth $500,000. Your daughter inherits your basis of $150,000. If she sells it for $500,000, she may owe tax on $350,000 of gain.
Inheriting Property After Death: The Step-Up Advantage
When someone inherits property after the original owner’s death, they receive a step-up in basis. This means the cost basis resets to the property’s fair market value on the date of death.
So if that same $150,000 property is worth $500,000 at the time of inheritance:
- The heir’s basis is now $500,000.
- If they sell it for $500,000, no capital gains tax is due.
This tax benefit can save heirs thousands—or even hundreds of thousands—of dollars, especially in hot real estate markets like Florida.
Why Timing Matters
The difference between gifting and inheriting isn’t just a technical tax detail—it’s a major financial decision. Gifting a highly appreciated property during life can unintentionally create a large tax burden for the recipient. In contrast, waiting to pass the property through your estate can allow heirs to benefit from a stepped-up basis and potentially avoid capital gains tax altogether.
Final Thoughts
Real estate is a powerful tool for building and preserving family wealth—but only if you understand how the rules work. Florida property owners enjoy many advantages, including no state income or capital gains tax. Still, federal capital gains rules and basis calculations apply.
Before transferring any property—whether as a gift or through your estate—it’s a smart move to consult with a tax advisor or estate planning attorney. A little planning now can mean major savings for your loved ones later.
By: Danielle Vaughn, Board Certified Real Estate Attorney