Gain on sale of house when spouse dies

[VanWinkle]

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Originally Posted by pb4uski 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]

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Originally Posted by skipro33 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/p56...40501135741600

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]

Quote:

Originally Posted by 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.

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]

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Originally Posted by Done 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/p56...40501135741600 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

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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.

[Cat-tirement]

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Originally Posted by Done 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.

Ours has no such language, but essentially says that upon the first death the trust estate remains in trust and unaffected by that death. (And we're not in a community property state.)

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Originally Posted by Done 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.

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Originally Posted by pb4uski 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.

It's also been my understanding that stuff (a legal term ) held in a trust is viewed as if owned directly. But if the trust is unaffected by the first death, isn't that conflicting with stepping up the basis?

[pb4uski]

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Originally Posted by Cat-tirement .... It's also been my understanding that stuff (a legal term ) held in a trust is viewed as if owned directly. But if the trust is unaffected by the first death, isn't that conflicting with stepping up the basis?

No, I don't think so... for example, while he was living my Dad was the beneficiary of his trust... upon his death my Mom became the beneficiary... upon her death us kids become the beneficiaries.... there is a step-up in the basis of assets owned by the trust in each event... when Dad died and when Mom dies.... just like there would be for an asset that Dad owned and that Mom inherited upon his death and then we inherit upon her death. YMMV.

[Done]

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Originally Posted by gauss IMHO, having the Qualifed Appraisal done by a Qualified Appraiser seems to be more of a Safe-Harbor than a requirement.

Thanks for pointing this out. So if one wants to save the appraisal fee on an inherited property and use a comparable FMV analysis, the IRS may accept the cost basis provided. If they question it, would IRS perform their own appraisal to determine if there was an underpayment, or would it be up to the taxpayer to then get a qualified appraisal?

Large estates are required to file a Form 8971 documenting the cost basis, and beneficiaries must use this value.

[Cat-tirement]

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Originally Posted by pb4uski No, I don't think so... for example, while he was living my Dad was the beneficiary of his trust... upon his death my Mom became the beneficiary... upon her death us kids become the beneficiaries.... there is a step-up in the basis of assets owned by the trust in each event... when Dad died and when Mom dies.... just like there would be for an asset that Dad owned and that Mom inherited upon his death and then we inherit upon her death. YMMV.

Thanks, your description makes sense. I had not really thought of us as beneficiaries of our own trust. Our primary goals were to avoid probate and exert more control over how things are paid out after we're gone.

Were you involved in documenting the step-up for your parents that required anything beyond looking at bank/brokerage statements, like property? If so, how did you do it?

[Done]

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Originally Posted by Cat-tirement Were you involved in documenting the step-up for your parents that required anything beyond looking at bank/brokerage statements, like property? If so, how did you do it?

For brokerages, ask them to prepare a letter documenting the date-of-death value. Some have a form for this which also adjusts the recorded cost basis.