any tax experts out there??

[manning]

A friend inherited a house last year (March) with another sibling. That sibling is the executor. The house was sold last month.

Here's the dicey part. The executor failed to have the house appraised at the time of death and the adjusted cost basis is unknown. I told him he better have the executor do something about it as I don't think he wants to get in side ways with the IRS.

He asked me how does he get the cost basis. I told him "you got me, I never had to do this". I did recommend he talk to a CPA.

Any ideas out there?

 

[golfgal]

If the person that bought the house financed the house they would have to have had an appraisal done, maybe you can get a copy from them?

 

[DVCLiz]

I don't know how much the value would have changed in a year, but I think your best bet would be to call the best realtor company in your town and ask an agent to help you. You might have to pay someone, but they could probably go back and look at comparable sales and work up some kind of estimate for you.

 

[manning]

If the person that bought the house financed the house they would have to have had an appraisal done, maybe you can get a copy from them?

That won't help. That appraisal gives the value of the house at time of sale. What he needs to know is what the value of the house was at the time of death to establish a new cost basis. What he has to do is pay taxes on the difference of the new cost basis and the net sale price.

Example, he inherited the house at a value of $100,000 (this is what is not known) and sold it last month for net $120,000 he has to pay taxes on $20,000. In this case half of that since it is being split two ways.

I hope that the price the parents had paid for the house isn't required to used. If so that is going to greatly increase the heirs taxes. The house was bought in the 1970s and prices have gone up a lot since then.

The problem is he doesn't know who to hire to get the answer.

 

[Charade]

That won't help. That appraisal gives the value of the house at time of sale. What he needs to know is what the value of the house was at the time of death to establish a new cost basis. What he has to do is pay taxes on the difference of the new cost basis and the net sale price.

Example, he inherited the house at a value of $100,000 (this is what is not known) and sold it last month for net $120,000 he has to pay taxes on $20,000. In this case half of that since it is being split two ways.

I hope that the price the parents had paid for the house has to be used. If so that is going to greatly increase the heirs taxes. The house was bought in the 1970s and prices have gone up a lot since then.

The problem is he doesn't know who to hire to get the answer.

Isn't that considered capital gains and it not subject to taxation until over a certain amount?

 

[DVCLiz]

I hope that the price the parents had paid for the house has to be used. If so that is going to greatly increase the heirs taxes. The house was bought in the 1970s and prices have gone up a lot since then.

Is this a typo, or do you really want him to have to pay more taxes???

In any case, the price the parents paid has nothing to do with his tax owed. The value of the house on the day he inherited it is the cost basis, and he will be taxed on the difference between that amount and what it sold for, just like your example.

 

[DVCLiz]

Isn't that considered capital gains and it not subject to taxation until over a certain amount?

No, it's just considered an asset of the estate for estate tax purposes. You have to add up the value of everything you inherit, and if you later sell something and the amount you sell it for is more than the amount you "paid" ie inherited it for, you have to pay personal tax on it.

 

[DVCLiz]

You could also tell him to go to the local municipal property tax office. They have all the records and could give you the tax value of the house on a certain date. Those values stay pretty steady because they don't get reevaluated too often. Of course, the downside to that is that the tax value is usually well below the retail value, so he would be more likely to have sold for a bigger profit using that figure, and would owe a lot more tax.

 

[DancingBear]

I don't see any way that the price from the 70s has to be used. This is just a matter of proof if the IRS challenges the value used, right?

First, seems to me there's a good chance that you could claim no gain, as residential market values haven't really risen since either March of 2005 or 2006 (not clear which one you're talking about). If you think prices have increased, seems like you could find out some reasonable figure from media reports talking about the average increases over that year, or a search of comparable sales in the area (you can do a lot of that online looking at tax records in many jurisdictions), and then just calculate back from the actual sales price in November and come up with a defensible figure. If you want to paper this more, pay a local real estate broker a fee to come up with a figure--they should be able to look back at sales in the area and come up with something reasonable.

Make sure both heirs use the same basis figure. Take a reasonable position and be prepared to explain to the IRS how they came up with it, if they ever are called upon to do so.

 

[DancingBear]

No, it's just considered an asset of the estate for estate tax purposes. You have to add up the value of everything you inherit, and if you later sell something and the amount you sell it for is more than the amount you "paid" ie inherited it for, you have to pay personal tax on it.

I got the impression from the OP that the property had been distributed out of the estate to the heirs, and the heirs are the ones with the potential taxable gain here, not the estate. (I also assume the estate was clearly within the exemptions, or an appraisal would have been done).

 

[Charade]

This just shows (IMO) that the tax code is too complicated and too oppressive.

 

[DVCLiz]

I got the impression from the OP that the property had been distributed out of the estate to the heirs, and the heirs are the ones with the potential taxable gain here, not the estate. (I also assume the estate was clearly within the exemptions, or an appraisal would have been done).

Yes, sorry if I wasn't clear. The house has a certain value at the date of death and is considered to be worth that amount when adding up the worth of an estate. The issue of how much individual tax this guy will owe, based on the difference between that and what he sold it for, is another issue. Sorry I wasn't clear!!

I'm the farthest thing possible from a tax expert, but did have this happen to me within the last several years, so I'm going on memory of how ours was handled.

 

[Cheshire Figment]

It is really simple. There is something called "stepped up basis". Any capital assets that are in a person's estate are all adjusted to Fair Market vale at the date of death (or any other date within six months as determined by the executor).

If there was no appraisal done at time of death, conttact the Real Estate Agent who handled the sale and ask them to, based on selling price, determine what was FMV at date of death.

Note that many of the closing costs (including the Agent Commission) and certain exprenses prepartory to sale are added to the stepped up basis to determine gain or loss on the sale.

I would suggest they use a professional tax preparer to assist with the return, someone a CPA level will not be necessary, just a person with aa few years experience in the business. If you go to a company like Jackson-Hewitt or HR Block ask that a manager or senior preparer do the return.

Mike (CPA Retired)