My terminally ill friend plans to sell her million-dollar condo now. Is it a bad idea to pay capital gains, instead of leaving it to her son?

Let’s say, for example, that Carissa bought her condo many years ago. Thanks to rapidly appreciating property values, it’s now worth $1 million, which is $500,000 more than she paid for it.

Carissa is thinking about selling sooner rather than later so she can pay the capital gains taxes she expects to owe, rather than saddling her son with the bill when she dies. Capital gains taxes are taxes typically paid when you profit from an asset.

So, should Carissa sell the property, or is there another solution? Lawyers have a warning for Carissa to read before she acts.

Selling a property before a death could be a major mistake

While Carissa’s heart is in the right place, selling the property now could be a huge financial mistake that costs her son a fortune.

“For most families, selling first to ‘take care of the capital gains tax’ gets it backward,” Lisa McCurdy, founder and managing partner of The Wealth Counselor, LLC, an estate and asset protection law firm, told Moneywise.

“When you sell during your lifetime, you pay tax on the gain. When your child inherits the home, the tax basis generally steps up to its value at your date of death. That can erase decades of appreciation. If your child sells soon after, there may be little or no capital gains tax at all,” McCurdy explained.

So, how does this play out exactly? As Haleh Moddasser, a CPA and senior wealth advisor at Hightower Signature Wealth, explained to Moneywise, “The step-up in basis means that the home your child now owns will be treated as though he acquired it at the current market value on your date of death.”

If Carissa passes when her home is worth $1 million, her son will be treated as if he’d bought it for $1 million instead of the $500,000 Carissa paid. If he sells it a month later for $1 million, he has no taxable gains at all.

“This is a substantial savings depending on the size of the gain within the home,” said Moddasser.

Carissa needs to look at the big picture

While selling the house during her lifetime won’t save her son money, this doesn’t mean Carissa must avoid putting the home on the market.