Gain on sale of house when spouse dies

[sakowitzm]

Please correct my thinking on this, if I'm wrong.

Couple has been married for 30 years; bought the house they currently live in 20 years ago, and lived in it continuously for 20 years. Estimated gain on the sale of the house is $500,000.

Husband dies in October of Year X. If the widow can act quickly, and sell the house by December 31 of Year X, the gain on the sale will be a non (taxable) event. She will file as Married, Filing Jointly for Year X, and can thus exclude the entire $500,000 gain.

However, if she sells the house on January 1 of Year X+1, she will only be able to exclude $250,000 of the gain, since she will be filing as a Single person for Year X+1.

Is that basically correct? Thanks for your help.

 

[VanWinkle]

Please correct my thinking on this, if I'm wrong.

Couple has been married for 30 years; bought the house they currently live in 20 years ago, and lived in it continuously for 20 years. Estimated gain on the sale of the house is $500,000.

Husband dies in October of Year X. If the widow can act quickly, and sell the house by December 31 of Year X, the gain on the sale will be a non (taxable) event. She will file as Married, Filing Jointly for Year X, and can thus exclude the entire $500,000 gain.

However, if she sells the house on January 1 of Year X+1, she will only be able to exclude $250,000 of the gain, since she will be filing as a Single person for Year X+1.



Is that basically correct? Thanks for your help.

Per this article in Washington Post, you have up to 2 years after spouses death for 500,000 exemption.

https://www.washingtonpost.com/news...es-heres-how-to-do-it/?utm_term=.ea1034870b11

 

[pb4uski]

No, the widow would get a stepped up basis for all or half of the house, depending on whether community property or not and the step up in basis would further reduce the gain.

https://www.wife.org/widows-pay-capital-gains-tax-sell-house-death-spouse.htm

As a recent widow, you have one more card to play to beat capital gains tax. In all likelihood, you and your husband owned your home jointly (both of your names were on the deed) or there was a built-in right-of-survivorship. What this means is that when your husband died, his half of the home went to you.

Something else happened during that transfer that most homeowners don’t realize. Your husband’s half of the home transferred to your ownership on a stepped-up basis. When he died, his portion of the house updated (or stepped up) to the current fair market value of the home. ...

 

[audreyh1]

What about cost basis increase on the house when one spouse dies? Don’t forget about that! A new basis for the house will have been established due to inheriting half the house. So the gain should be half as high initially, not taking into account later gain of course. That’s assuming joint ownership.

Oh, I see pb4uski beat me to it.

 

[VanWinkle]

No, the widow would get a stepped up basis for all or half of the house, depending on whether community property or not and the step up in basis would further reduce the gain.

https://www.wife.org/widows-pay-capital-gains-tax-sell-house-death-spouse.htm

Correct per the article I linked:

On your husband’s share of the home, you inherited the home at a value of $250,000 and are now selling that share for $250,000. That means that you’d pay no tax on the sale of his half when you sell and you wouldn’t pay any tax on your half since the profit on your half is under the $250,000 exclusion you’re allowed. If this is how the numbers were to play out, you wouldn’t have any federal income taxes to pay on the sale of the home.

 

[donheff]

How does a widow or widower document the change? Are there tables you can use after the fact to retroactively determine the value at the time of death?

 

[gauss]

No, the widow would get a stepped up basis for all or half of the house, depending on whether community property or not and the step up in basis would further reduce the gain.

+1 - I had to dig into this recently and this was my conclusion also.

In non-community property states, the deceased owner receives a stepped up basis to FMV on date of death. The remaining owner(s) retain their original basis.

In community property states it is even more advantageous.

-gauss

 

[TrvlBug]

How does a widow or widower document the change? Are there tables you can use after the fact to retroactively determine the value at the time of death?

At time of death, the widow(er) should get a CMA or appraisal especially in fast appreciating areas. We did this when my mother passed and had to sell the house a couple of years later. We had a local realtor prepare a CMA. Father's appreciation was well above the $250K allowed and would have had a taxable event had we not had the documentation. I'm sure there are ways to look back at values at time of death, however, this would be more difficult.

 

[sakowitzm]

Thanks for the replies; very helpful.

So then... if the wife sells the four years later (thus outside of the two year period), her half of the gain would be $250,000 (and probably a little more, accounting for additional appreciation), but the husband's half would be considerably less than $250,000, since the cost basis is adjusted to market price at the time of his death.

Thus.... it would be likely that the overall gain for the widow might be something in the $260,000 - $280,000, and after the single person exclusion, something less than $50,000. A whole lot better than $250,000.

Thanks.

 

[pb4uski]

If the couple lived in a community property state then there might be a 100% adjustment of basis rather than 50%.

See https://ttlc.intuit.com/questions/3...use-cost-basis-step-up-due-to-death-of-spouse

Otherwise, yes... her new basis would be her old basis plus $250,000 (1/2 of the $500,000 unrealized appreciation as of the date of death). Her subsequent gain would be the sales price less her adjusted basis.

Also, any gain that is taxable... the less than $50,000 in your post above, would be at 0% or 15% depending on her total taxable income.

 

[sakowitzm]

pb4uski -- I was going to ask about how the gain is treated, but didn't want to clutter up the thread at first.

So the gain is treated the same way as a long term capital gain on the sale of IBM stock?

 

[CaliKid]

On the issue of community property there is, theoretically, a question if joint tenancy property is really "community property" or not but I think most CPAs would treat as CP and give full step-up at first death. If house were multi-millions and not titled in CP then I would advise getting a spousal property petition (in Cali) or whatever it's called in other CP states so there is a court order confirming it really is community property.

 

[pb4uski]

^^^^^ good idea... the devil is in the details... but I would think that whether or not an asset was community property or not is really a legal question rather than a tax question.

pb4uski -- I was going to ask about how the gain is treated, but didn't want to clutter up the thread at first.

So the gain is treated the same way as a long term capital gain on the sale of IBM stock?

Yes.

 

[audreyh1]

How does a widow or widower document the change? Are there tables you can use after the fact to retroactively determine the value at the time of death?

Ideally you have an appraisal or something to document the ptooerty value when the spouse dies.

My Dad inherited a house and farmland from my mom when she passed. I only recently learned that it hadn’t been appraised or a value set. I assumed it had, because the land had been resurveyed at the time. But apparently only the survey was done.

So if Dad decides to sell the land we have some work cut out for us to establish his basis fromover 20 years ago.

 

[Cat-tirement]

An interesting topic, something I should put in my notes for future use by myself or DW.

Does any of this change if the house is titled in a revocable trust, where the husband and wife are trustees?

 

[skipro33]

We have our home in our trust. If one of us dies, nothing changes since the house isn't in our names, but the trust. So nothing changes if either of us precedes the other and wants to sell later.

 

[nwsteve]

Another option for setting real estate values from prior years is to retain an appraiser who has a MAI (Member of Appraiser Institute) certification. The certification is the CPA for appraisers. Every property does not really need a MAI appraisal but more complex ones like producing farms, industrial and commercial properties would benefit.
For a simple residence, I would make a copy of county tax assessor valuation and "call it good" unless there was an audit.

 

[Done]

Does any of this change if the house is titled in a revocable trust, where the husband and wife are trustees?

I think this depends on the wording of the trust. Mine specifically says that trust property held in both names (A and B, as trustees of the C Trust) is community property. The surviving spouse would get 100% step-up in basis.

We have our home in our trust. If one of us dies, nothing changes since the house isn't in our names, but the trust. So nothing changes if either of us precedes the other and wants to sell later.

The house remains owned by the trust, but the surviving spouse should still have it valued to step up the tax basis. Any appreciated trust assets such as taxable brokerage accounts and collectibles should be valued to adjust the basis.

 

[skipro33]

The house remains owned by the trust, but the surviving spouse should still have it valued to step up the tax basis. Any appreciated trust assets such as taxable brokerage accounts and collectibles should be valued to adjust the basis.

Valued how? A full blown appraisal or would a market analysis from a real estate agent suffice? This wouldn't trigger a recalc for property taxes, would it? (California property under Prop13)

Unless the surviving spouse sold the house, it really wouldn't matter, would it, as long as they live there?

If the home was reverse mortgaged, say, how would that affect things?

 

[pb4uski]

....The house remains owned by the trust, but the surviving spouse should still have it valued to step up the tax basis. Any appreciated trust assets such as taxable brokerage accounts and collectibles should be valued to adjust the basis.

That is my understanding as well... for tax purposes it is as if the beneficiaries of the trust owned the assets directly even though legal title is in the name of the trust.

 

[VanWinkle]

That is my understanding as well... for tax purposes it is as if the beneficiaries of the trust owned the assets directly even though legal title is in the name of the trust.

All property inside the trust is "stepped up" for the beneficiaries of the trust. Appraisals of said property upon the death of the trustee is the common method of the stepped up basis.

 

[Done]

Valued how? A full blown appraisal or would a market analysis from a real estate agent suffice? This wouldn't trigger a recalc for property taxes, would it? (California property under Prop13)

Unless the surviving spouse sold the house, it really wouldn't matter, would it, as long as they live there?

If the home was reverse mortgaged, say, how would that affect things?

I am not a lawyer or tax professional but this is my understanding:

To establish the cost basis of the home for eventual sale, the surviving spouse will need a date-of-death Fair Market Valuation. IRS requires a written Qualified Appraisal by a Qualified Appraiser, as they define them, meeting the same requirements as for appraisals of noncash charitable contributions.
https://www.irs.gov/publications/p561#idm140501135741600

This effectively means that a licensed real estate appraiser must be used. If you rely on just a comp analysis by a local realtor, IRS can question or deny it. It is best to do the appraisal shortly after the death, but a retrospective appraisal can be done later.

Yes, cost basis is only relevant when the home is sold, but probated or large estates may require an appraisal for the estate process anyway. Rental real estate should be appraised for stepped-up basis and a reset in depreciation.

Deleting a deceased spouse trustee from the title should not trigger reassessment for property tax in California.

A mortgage does not affect cost basis, but the debt will pass to the survivor along with the property.

 

[anethum]

My parents bought their house in the 1950s and it was jointly held in a non-community property state. In the 1990s, my parents established revocable trusts and divided their assets putting roughly half in each trust. The house was put in my mom's trust. Would there be a new step-up value for the house based on its value when it was transferred to my mom's trust?

My dad died 3 years ago, but my 96 year old mom is still living in her house. The LTCG since the revocable trust was created is far in excess of $250K because it's in a high cost-of-living area and home values have exploded since then. Of course, there are even higher gains if we go back to the 1950s purchase price ($21K). I'd like to avoid my mom having to sell the house while she's alive because of the tax bill which would be incurred.

 

[pb4uski]

My parents bought their house in the 1950s and it was jointly held in a non-community property state. In the 1990s, my parents established revocable trusts and divided their assets putting roughly half in each trust. The house was put in my mom's trust. Would there be a new step-up value for the house based on its value when it was transferred to my mom's trust?

My dad died 3 years ago, but my 96 year old mom is still living in her house. The LTCG since the revocable trust was created is far in excess of $250K because it's in a high cost-of-living area and home values have exploded since then. Of course, there are even higher gains if we go back to the 1950s purchase price ($21K). I'd like to avoid my mom having to sell the house while she's alive because of the tax bill which would be incurred.

No, the basis would not be impacted when the house was transferred to mom's trust.

The tax bill will roughly be 15% of the gain in excess of $250k unless the taxable gain causes her taxable income for 2018 to exceed $426k, in which case some of the gains might be at 20% rather than at 15%. See your tax advisor.

 

[gauss]

I am not a lawyer or tax professional but this is my understanding:

To establish the cost basis of the home for eventual sale, the surviving spouse will need a date-of-death Fair Market Valuation. IRS requires a written Qualified Appraisal by a Qualified Appraiser, as they define them, meeting the same requirements as for appraisals of noncash charitable contributions.
https://www.irs.gov/publications/p561#idm140501135741600

This effectively means that a licensed real estate appraiser must be used. If you rely on just a comp analysis by a local realtor, IRS can question or deny it. It is best to do the appraisal shortly after the death, but a retrospective appraisal can be done later.

Yes, cost basis is only relevant when the home is sold, but probated or large estates may require an appraisal for the estate process anyway. Rental real estate should be appraised for stepped-up basis and a reset in depreciation.

...

Thank you for bringing this up. This issue has dogged me since I inherited my late DF's condo ~ 4 years ago. I wore two hats during the process as I was the sole beneficiary of his will and also the Personal Representative of the estate.

Your cautionary note caused me to review this today. AFter my review, I think what you stated may be a bit of overkill. IMHO, having the Qualifed Appraisal done by a Qualified Appraiser seems to be more of a Safe-Harbor than a requirement.

This basis is in the context of Capital Gains that would be assessed down the road upon sale and for setting up a depreciation schedule as a rental property.

If there is no misstatement of valuation, then there would be no need for the Safe Harbor. In my case I documented the sales prices of all similar condos in the development from the county recorder of deeds and based my valuation o n this data. Also in my case, the value of the estate was way below the estate tax threshold so the new rules that came on line in 2015 (aka IRS form 8971) would not apply

I base this on IRS Publication 559 (2017), Survivors, Executors, and Administrators

In the section

Valuation misstatements.
If the value or adjusted basis of any property claimed on an income tax return is 150% or more of the amount determined to be the correct amount, there is a substantial valuation misstatement. If the value or adjusted basis is 200% or more of the amount determined to be the correct amount, there is a gross valuation misstatement.

Understatements. A substantial estate or gift tax valuation misstatement occurs when the value of property reported is 65% or less of the actual value of the property. A gross valuation misstatement occurs if any property on a return is valued at 40% or less of the value determined to be correct.

Penalty. If a misstatement results in an underpayment of tax of more than $5,000, an addition to tax of 20% of the underpayment can apply. The penalty increases to 40% if the value or adjusted basis reported is a gross valuation misstatement.

The IRS may waive all or part of the 20% addition to tax (for substantial valuation overstatement) if the following apply.

• The claimed value of the property was based on a qualified appraisal made by a qualified appraiser.
• In addition to obtaining such appraisal, the taxpayer made a good faith investigation of the value of the contributed property.

No waiver is available for the 40% addition to tax (for gross valuation overstatement).

For transitional guidance on the definitions of "qualified appraisal" and "qualified appraiser," see Notice 2006-96, 2006-46 I.R.B. 902, available at IRS.gov/irb/2006-46_IRB/ar13.html.

The definitions apply to appraisals prepared for the following.

Donated property for which a deduction of more than $5,000 is claimed.
Returns filed after August 17, 2006.