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step up basis
Old 03-08-2020, 12:05 PM   #1
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step up basis

Hi,

I am getting a lot of helpful information in depth in this site. I really enjoy and appreciate.

Since I get inherited rental properties, many informed me about step up basis.

My sister was flipper and she bought most of it half priced and doubled up in value.

One of lawyer said about the step up basis.

Step-up basis for inventory for the probated can be used just government record number. Or if step up basis is higher than the appraisal number, it will save my capital gain tax later.

I understood this part.

But I am confused that he mentioned if asked the agent to make number high, it is more beneficial.

So if step up number is higher, is it gonna affect the property tax increase??

Also, does she need to pay capital gain tax thru the probate too? I was not aware of this and could be concern. because she made good increase in value. One example, she bought a house $30000. now worth about $250000.

I am getting all hers alone, so which way I would save more money? If I keep those properties about 5 to 10 year?

MO capital gain tax rate is 6% per google.

Thank you for replies in advance.
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Old 03-08-2020, 12:13 PM   #2
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Your question jumps around a lot.

This is my vague understanding of how it works (so if someone wants to correct me, that would be great):
  1. Your sister died,
  2. estate gets house valued as of the date of death, that is the step up in basis (technically value on date of death).
  3. estate transfers the house to you,
  4. You sell house anytime you want, using step up value as basis saving a lot in Capital gain.
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Old 03-08-2020, 12:16 PM   #3
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There is no direct connection between stepped up basis and property tax appraisal value.

The property tax appraisers will do what they do and it varies from one state to another so the stepped up number should not affect your property taxes... in fact, the property tax appraisers won't even know what the stepped up basis is... that is your private information.

While you can use the property tax appraisal for the stepped up basis, if I were you, I would pay a few hundred per property to have an independent appraisal of the properties done so you have good documentation of the stepped up basis for the IRS... and let the independent appraiser know that the appraisal is being done for stepped up basis when you engage them and they will take it from there.

In my experience property tax appraisal value are typically consistently lower than fair values that would be used for a stepped up basis. They do this intentionally to reduce the number of griveances by taxpayers but it ends up fair since all properties are low by a similar percentage. So it would be best for you to do an independent appraisal.

Figure it this way.... at a 15% capital gains rate the independent appraisal would only need to be $2,000 higher than the property tax appraisal for you to recover a $300 independent appraisal fee.
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Old 03-08-2020, 12:16 PM   #4
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Hi,
....
Also, does she need to pay capital gain tax thru the probate too? I was not aware of this and could be concern. because she made good increase in value. One example, she bought a house $30000. now worth about $250000.
.....
No, estate does not pay capital gain, as estate is not selling the place. It will transfer to you, and the basis gets stepped up to $250000. So you can sell it anytime without paying the capital gain from $30,000 -> $250,000 gain.
Gov't loses out on ever collecting that capital gain.
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Old 03-08-2020, 12:26 PM   #5
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Thank you for quick responses.

Yeah, I was in the right track. That was I was thinking. I have asked my real estate agent guy and explained. He is doing it for free as courtesy because I am selling a few thru him now.


Thank you!!!
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Old 03-08-2020, 02:20 PM   #6
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SGOTI is not a reliable expert advisor, particularly for situations for which SGOTI has limited or no information. Seek professional advice, please.
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Old 03-08-2020, 03:14 PM   #7
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SGOTI is not a reliable expert advisor, particularly for situations for which SGOTI has limited or no information. Seek professional advice, please.
+1
OP - While internet advice gets you to look at situations with certain considerations, you should still follow up with a professional (real estate lawyer ?), to be sure you are doing the right thing.

For example: I'm not sure a real estate broker is qualified in IRS eyes to do a property appraisal, especially with a conflict of interest of selling the property for you.
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Old 03-08-2020, 06:04 PM   #8
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... For example: I'm not sure a real estate broker is qualified in IRS eyes to do a property appraisal, especially with a conflict of interest of selling the property for you.
+1 notice in the prior post I wrote of paying for a professional independent appraisal.... that is the gold standard for things like this and is well worth the little that you will pay... a comparative analysis by a real estate broker isn't nearly as authoritative.
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Old 03-08-2020, 07:24 PM   #9
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+1 notice in the prior post I wrote of paying for a professional independent appraisal.... that is the gold standard for things like this and is well worth the little that you will pay... a comparative analysis by a real estate broker isn't nearly as authoritative.
You may be right, but a lawyer I interviewed stated here 3 comp analysis is acceptable here. But I will think about hiring an appraisal because one of house could be very beneficial to get accurate.

And I am using him because long relationship history with sister, to me he does in low number for his benefit. I asked him to make number high for the probate.
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Old 03-09-2020, 06:50 AM   #10
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Just curious, if you sell a property soon after inheriting does the sale price itself document the market value or do you sty need an appraisal
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Old 03-09-2020, 09:42 AM   #11
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Just curious, if you sell a property soon after inheriting does the sale price itself document the market value or do you sty need an appraisal
If it was an unrelated 3rd party that bought it, and it sold via a real estate agent that had multiple showings/offers , I would say that is the true market value (of course I'm not a tax expert).

However, I did use the purchase price in those circumstances to get a property tax reduction on a house I bought, as it was an easy way to show the "true" market value.
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Old 03-09-2020, 12:59 PM   #12
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Just curious, if you sell a property soon after inheriting does the sale price itself document the market value or do you sty need an appraisal
I would say the latter as a single sale doesn't necessarily indicate the market as any single sale could be above, at or below market. It all depends on how much audit risk you want to assume.
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Old 03-09-2020, 08:37 PM   #13
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I have no idea of what they would do today, but a few decades ago when you actually had to fill out an estate tax return the IRS looked at appraisals differently...


I did an estate return and the auditor was NOT going to give us the value that was determined by an independent appraiser.... even though it would mean more estate taxes due they would not give in at all... they had their own appraiser and that is what they went with...


Now, we were able to get some higher prices on other assets so in the end the client was OK with the lower value...


Since you will not be audited I would go with the independent appraiser... make sure that you get the whole report as it should have a lot of data behind how it was determined with pics etc....
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Old 03-09-2020, 10:50 PM   #14
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....
I did an estate return and the auditor was NOT going to give us the value that was determined by an independent appraiser.... even though it would mean more estate taxes due they would not give in at all... they had their own appraiser and that is what they went with...
......
Sometimes I do wonder at the brilliance of gov't employees
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Old 03-10-2020, 09:40 AM   #15
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Just curious, if you sell a property soon after inheriting does the sale price itself document the market value or do you sty need an appraisal
The sale price within a reasonable time after date of death is the best indication of date of death value. The IRS will accept this as the basis and therefore there is no gain or loss.
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Old 03-10-2020, 10:07 AM   #16
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I have no idea of what they would do today, but a few decades ago when you actually had to fill out an estate tax return the IRS looked at appraisals differently...


I did an estate return and the auditor was NOT going to give us the value that was determined by an independent appraiser.... even though it would mean more estate taxes due they would not give in at all... they had their own appraiser and that is what they went with...
The auditor was not so stupid. He knew you wanted the higher basis for income tax purposes and I'd be quite certain the estate tax rate was lower.
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Old 03-10-2020, 11:13 AM   #17
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The auditor was not so stupid. He knew you wanted the higher basis for income tax purposes and I'd be quite certain the estate tax rate was lower.
Gill
So are you suggesting there are 2 taxes at play ?

Estate tax, and capital gain tax ?

I could see how swaying the value one way or the other could be a benefit depending upon the respective tax rates.
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Old 03-10-2020, 03:55 PM   #18
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So are you suggesting there are 2 taxes at play ?

Estate tax, and capital gain tax ?

I could see how swaying the value one way or the other could be a benefit depending upon the respective tax rates.
Absolutely. Thatís what itís all about. A common strategy with estates subject to estate tax.
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