Valuation of Inherited Property for Tax Purposes

[TrvlBug]

I'm hoping someone in the same situation can advise how they handled this issue. MIL passed a year ago and DH inherited 2 homes. She lived in the midwest, in the middle of nowhere (very rural area) where home prices do not appreciate like they do here in the SF Bay Area. One of the homes sat empty for 15 years with lots of deferred maintenance and the other was 30 years old and never been updated. We sold at auction for what they were worth.

It didn't occur to us to get a valuation as we sold the homes immediately. One 2 months after death and the other 3 months later. The second we had to travel back to clean it out. They have basements in the midwest and MIL was a packrat.

Now my tax lady wants a valuation as she believes we will have a gain on the second property. I sent her an e-mail last night outlining the above and am waiting for her response.

I looked at Zillow and the deferred maint. house is valued at much more than sale price, the other one at less. However, the second home is zoned commercial which commands a higher price.

Any thoughts on how to handle this? We do not want to pay gains as we don't believe there were any.

 

[GrayHare]

A real estate agency can likely refer you to a home appraiser who can supply a written retroactive valuation for each house that will serve as a cost basis to keep the IRS happy. A full evaluation will require the appraiser to see the interior, which might be problematic at this point. Unsure how you deal with that. Expect to pay a few hundred dollars for each appraisal.

 

[Jimbo125]

I think you need a new tax lady.

Inherited property gets a step up in basis to the value at date of death. You can also elect to have an alternate valuation date of six months after death.
The only gain you should have is between the date of death and the date of sale. If you elected the alternate valuation date, then both homes were sold prior to that date, so you have no gain.

This assumes that the your DH wasn't a co-owner of the house at date of death.

https://www.elderlawanswers.com/do-you-pay-capital-gains-taxes-on-property-you-inherit-12384

 

[RunningBum]

I would think that by selling it almost immediately, you established the market price with the sale. An appraisal is more of a guess, while a sale seems like the actual value. But I have no experience with what the IRS expects. Why does the tax lady think you got a better price on one than it was worth, and a worse price on the other? Did the market really change in those 2-3 months?

 

[Sunset]

I would go with the valuation is what they sold for, since they sold at auction, and it was very soon after the death.

In fact after your auction costs, you really ended up getting less than the value of the homes at the time of death. (I'm thinking auctions like selling via a real estate broker have costs to the seller including legal costs).

Remember, evaluations are only guesses of the value of the house.
Between an evaluation and an actual auction sale or true 3rd party sale, I would think the actual sale is the true value rather than some guess at the price.

Your tax lady who is probably use to CA prices going up every day has a bad assumption. She is also not the authority on this, so I would tell her to use the full (before costs) auction price as the value at the time of death.
Therefore you have a loss on the actual sale(s).

 

[GrayHare]

If home prices have not been increasing in that area, there is a decent chance an appraisal would come in with a higher price than at which you sold, which would provide a capital loss to deduct against other gains.

 

[RunningBum]

If home prices have not been increasing in that area, there is a decent chance an appraisal would come in with a higher price than at which you sold, which would provide a capital loss to deduct against other gains.

Can you take a capital loss on personal real estate? I don't think this qualifies as investment real estate you might be able to take a loss on.

 

[pb4uski]

My view would be that a public auction is prima facie evidence of the market value of the two properties and since they were sold shortly after your MIL's death that your basis should be equal to the sales price and you would have a loss for your selling costs. Can you elaborate about the auctions? Were there numerous parties that bid on the properties?

Did you get any estimates of value in the selling process... like if you taled with real estate agents about selling the property?

I don't see that an appraisal is going to do much for you other than just add cost... and the tax risk seems very negligible.

 

[GrayHare]

Can you take a capital loss on personal real estate? I don't think this qualifies as investment real estate you might be able to take a loss on.

That's a good point. IIRC for the deduction the new owner at minimum would have had to ready the property for rental.

 

[harley]

My view would be that a public auction is prima facie evidence of the market value of the two properties and since they were sold shortly after your MIL's death that your basis should be equal to the sales price and you would have a loss for your selling costs. Can you elaborate about the auctions? Were there numerous parties that bid on the properties?

Did you get any estimates of value in the selling process... like if you taled with real estate agents about selling the property?

I don't see that an appraisal is going to do much for you other than just add cost... and the tax risk seems very negligible.

I agree with this. I think reporting the value as the sales price is totally legitimate. I'd do it, and see if the IRS has anything to say about it. If they do, then you can pull together the paperwork. But no matter whether it would be a gain or a loss, it would be such as small amount as to be negligible. And I think you probably have a 99% chance of it sailing on through without comment, and I wouldn't waste any time on it until or unless I had to.

 

[pb4uski]

That's a good point. IIRC for the deduction the new owner at minimum would have had to ready the property for rental.

Not necessarily... it just has to not have been a personal use property.... could hold it for capital appreciation without intending to rent it and it woud still qualify.

https://www.hrblock.com/tax-center/income/investments/capital-gains-or-loss-on-inherited-property/

 

[GrayHare]

Not necessarily... it just has to not have been a personal use property...

Well then there you go. I was thinking mainly about the house that the OP said Zillow had valued for much more than it sold. Of course Zillow is not terribly accurate, nor is a valid appraisal for tax purposes.

 

[RunningBum]

Not necessarily... it just has to not have been a personal use property.... could hold it for capital appreciation without intending to rent it and it woud still qualify.

https://www.hrblock.com/tax-center/income/investments/capital-gains-or-loss-on-inherited-property/

TT also confirms that a loss can be claimed:
https://ttlc.intuit.com/questions/2...d-from-the-sale-of-inherited-property-taxable

So that's another thing I stand corrected on today. Something else that stood out to me in this article:

For the date acquired, enter “Inherited.” This makes sure you receive long-term capital gain or loss treatment.

So you not only get step-up basis on inherited property, but you also get LTCG (or loss) treatment. I did not realize that. I assumed with the step-up basis, the "purchase date" would be the date you inherited it. I confirmed with a couple other sources that it is immediately treated as LT.

 

[pb4uski]

Interesting... learn something new every day.

 

[LakeRat1]

Jimbo125 is correct ..... I went through this when my folks passed and I inherited their condo

 

[gauss]

I wouldn't try to claim a loss on either of these properties. Losses can only be claimed on business use property or property held for investment. It does not sound like that was the purpose of your owning these properties.

On the other hand, as others have suggested, I don't think you will have a gain either.

Did you receive form 1099-S for the sale(s)?

Tax Lady is probably asking for the basis in that is the taxpayer'ss responsibility to determine basis. Perhaps give her a statement with your best estimate of the FMV on the date of death -- which may be the gross auction sale price. With the auction costs, you will likely not have a gain.

-gauss

 

[Bamaman]

Telll the tax lady to use the auction price as the basis. Then count the auction fees as a loss.

 

[TrvlBug]

Thanks for the input. The tax lady seems to be happy with my explanation and using the sale price for the FMV. Thank you Jimbo for the info about using an alternate valuation date...no gain for us and the IRS should be satisfied. Can't believe that the form needing to be completed is 31 pages, but that's the gov't for ya .

 

[TrvlBug]

My view would be that a public auction is prima facie evidence of the market value of the two properties and since they were sold shortly after your MIL's death that your basis should be equal to the sales price and you would have a loss for your selling costs. Can you elaborate about the auctions? Were there numerous parties that bid on the properties?

Did you get any estimates of value in the selling process... like if you taled with real estate agents about selling the property?

I don't see that an appraisal is going to do much for you other than just add cost... and the tax risk seems very negligible.

We interviewed a realtor but he had difficulty with comps and told us they would take about 6 mos. if not longer to sell. We were resigned to the process until we interviewed an auctioneer about auctioning the contents (there is no such thing as an estate sale in the boonies. These types of personal property are sold at auctions.

The auctioneer said, why don't you auction the homes? We interviewed another auctioneer who was also a real estate broker and decided that was the way to go. The homes were emptied of all the crap, he placed ads in the local paper, his on line auction site as well as a generic one and showed the properties for about a month. The deferred maint/major reno/tear down was bought by a contractor. There were 4-5 people bidding.

Her primary residence had about 10 people bidding. The auctions were absolute auctions with minimum bids meaning the houses were sold to the highest bidder above a minimum bid. The minimum bid was set very low to attract interest and there definitely was interest. We were nervous with the low minimum bids but then, figured, the homes would sell for what they were worth. It really worked out very, very well.

 

[CaliKid]

Get a new tax person.

The alternate valuation date applies only to 706 (estate tax return) so ignore that advice above.

I would just go with the sale price and assume no gain. That's very reasonable any place but especially in slow growth areas.

I would not bother getting an appraisal unless you get audited which you won't.

Good luck.

 

[TrvlBug]

Get a new tax person.

The alternate valuation date applies only to 706 (estate tax return) so ignore that advice above.

I would just go with the sale price and assume no gain. That's very reasonable any place but especially in slow growth areas.

I would not bother getting an appraisal unless you get audited which you won't.

Good luck.

Thanks CaliKid. Actually, we've pretty much decided to stay with our tax man. We are/were in the process of looking for a new tax person and selected a larger company who apparently farmed out our return to one of their inexperienced CPAs. We are having our taxes done by both for various reasons. When I spoke to our 'old' tax man about the inheritance and provided the same information, his response was 'no problem, we're good to go and if they come back for anything we'll deal with it then.' That's why I was so surprised to get the e-mail from our 'new' person requesting a date of death valuation.

 

[wolf]

I think you need a new tax lady.

Inherited property gets a step up in basis to the value at date of death. You can also elect to have an alternate valuation date of six months after death.
The only gain you should have is between the date of death and the date of sale. If you elected the alternate valuation date, then both homes were sold prior to that date, so you have no gain.

This assumes that the your DH wasn't a co-owner of the house at date of death.

https://www.elderlawanswers.com/do-you-pay-capital-gains-taxes-on-property-you-inherit-12384

+1. Agree