Tax question re inheriting a paid off house…

I can't help with the taxes but sorry for your loss.

Generally, the basis will be the date of death value. So, her gain or (non deductible) loss will depend upon the difference between the date of death value and whatever she ultimately receives for it. If she incurs any expenses in selling it, she can deduct that from any gain. So, unless there’s some violent shake up in the market that makes the value of the house skyrocket between date of death and date of sale, generally, they’ll be no income tax.

You owe taxes on appreciation when sold.

The stepped-up basis is market value at the date of death.


300k sold at 300k equals no tax.

Sell it for 350k, owe on the 50k.

Thanks to all respondents for the replies. I was starting to “horriblize” over taxes & overall complexity.

Cheers

Arizona has no estate tax, so no worries there.

Re the capital gains, if the probate process there requires a list of assets and their valuation at death, suggest the lawyer "high ball" the estimate on the house. No reason to low ball it since there is no estate tax. That gives you something to point to as a high basis and lessen the risk of cap gains when the house is sold.

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suggest the lawyer "high ball" the estimate on the house. No reason to low ball it since there is no estate tax. That gives you something to point to as a high basis and lessen the risk of cap gains when the house is sold.

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Be careful here.

I consulted on a situation like this. Guy owns a rental property and dies. Attorney puts the value on the sworn descriptive list for like $1.1M. Heir continues to rent property out for another couple of years. Heir's tax preparer put it on heir's depreciation schedule at $1.1M since that was what was on the sworn descriptive list.

Property gets sold a couple of years later... for $265K. Heir wants to take a massive capital loss. Heir's tax preparer balks at this, so he gets fired and heir finds another preparer who will take the loss.

Then comes the IRS letter...

Attorney pulled a number out of his backside and had absolutely no substantiation for the amount. IRS disallows the loss. I spoke with a local appraiser who said the house was probably worth around $250K at time of inheritance. So technically there was a gain, especially when you consider all the extra depreciation taken. We got the IRS to agree to just disallow the loss and not go after any gain or any depreciation taken incorrectly.

Suggestions were made (not by me) that the heir should file a bar complaint against the attorney, but the heir declined.

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Question for the tax people out there. Do they need to establish the step-up basis on the date of death or is there still an odd "or 6 months after death" rule out there.

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In most cases, this isn’t an issue. Remember, the “alternate valuation date“ is an election made by the estate representative on a federal estate tax return. The vast, vast majority of estates never file an estate tax return. Right now, an estate would have to be valued at over $13 million ($27 million for a couple), so this election is never made.

However, in the event that an estate tax return is required and and estate taxes are due, then the estate tax representative can elect the six month after death alternate valuation date. In that case, the beneficiary will receive a basis that comports with what is filed on the estate tax return. The IRS doesn’t want a lower value for estate tax purposes, but a higher basis for income tax purposes for the beneficiary.

Of course, practically speaking the only way the estate tax representative would choose the alternate valuation date is if the valuation of all assets for estate tax purposes is lower on the valuation date than it is on the date of death. That would mean that the beneficiary would get a lower "stepped up" basis and would be subject to more potential income tax upon sale. As a result, the beneficiary definitely has an incentive to coordinate with the estate tax representative in making the determination on whether the sixth month alternative evaluation date is elected.

If the alternate valuation date is elected, it applies to all assets in the estate. You can’t just choose which assets you want subject to the alternate valuation date. So, unless the beneficiary inherits a major portion of the estate and is involved in the administration of the estate, the beneficiary might not have much of a say.

I believe there’s some exception if the asset is sold before the six month alternate valuation date. In that case, I think the value taken by the beneficiary is the date of sale value if the estate tax representative ultimately chooses the alternate valuation date for all other assets.

ETA: One more thought, the Trump tax cuts doubled the estate tax exclusion from $5 million to $10 million. It is now risen to over $13 million due to inflation adjustments. The Trump tax cuts expire at the end of 2025. Therefore, if the Congress does not extend the Trump tax cuts, then the estate tax exclusion will revert back to $5 million. This $5 million will be index to inflation back to 2017 so that the exclusion will be exactly half of what it is now, i.e., under $7 million. In that case, you’ll have a lot more estates requiring an estate tax return.

Remember, Kamala da Ho has already stated that if she’s elected, she will allow the Trump tax cuts to expire. Like all the border protection executive orders, she’ll do this partially because it just has Trump‘s name associated with it. The fact that people in lower tax brackets benefited the most (on a percentage basis) under Trump’s tax cuts is irrelevant to the Democrats. They just want to make sure that they get rid of anything that has Trump’s name associated with it.

The only thing that may save the increased estate exclusion amount is the fact that so many Congresspeople have become multimillionaires thanks to their “service." Therefore, they may want to keep that one provision in the Trump tax cuts. The estate tax is essentially a flat 40% tax once you have reached the estate tax exclusion amount. The scumbags in Congress are not going to want to be subject to that 40% rate in the event they(or their spouse) dies.

Think about what Nancy Pelosi and her husband are now worth thanks to Paul Pelosi being the most brilliant/luckiest {wink, wink} stock picker to have ever lived. Her estate tax will be enormous when Paulie dies.

Sorry for the rant.

To add to what others have said, it may be of use for her to obtain an appraisal as to the date of death FMV. This would serve as a record should she be audited in the future, rather than a non-expert opinion on value.
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Only necessary if you are anxious about it. One can place a reasonable value on the house without an appraisal. Just get some comps from a realtor or from an online app like zillow. Print it for your records. That is the approach we used about 10 years ago, and never had a problem. An auditor would have to show proof that the value you assigned was grossly negligent.