June 3, 2019 By

Q&A: Selling an inherited house to a relative will affect tax treatment

Dear Liz: My mother recently died, leaving a house to my three siblings and me. We had the house appraised in February. My sister is buying the rest of us out. We decided to give our sister a break and sold her the house below the appraised amount. As the “selling price” (which will be a public record) will be below the appraisal, can I take my “loss” on my taxes this year? I gave her a $25,000 reduction, so I assume I can take $3,000 a year for eight years. Is this true?

Answer: Probably not.

The sale to a family member probably dooms any chance of taking a capital loss, said Mark Luscombe, principal analyst for tax and accounting at Wolters Kluwer.

“The law is not entirely clear on this topic with the IRS perhaps taking a more severe stand than the Tax Court, but both seem to frown on any use of the real estate for personal purposes after the death of the parent,” Luscombe said.

For a capital loss, the IRS appears to require that the inherited property be sold in an arm’s length transaction to an unrelated person, Luscombe said. The IRS also requires that you and your siblings did not use the property for personal purposes and did not intend to convert the property to personal use before the sale.

Even the Tax Court cases appear to at least require a conversion to an income-producing purpose before the sale and no personal use of the property after the death of the parent.

“The reader may find a court willing to say that personal use by a sibling is not personal use by the reader, and, from the reader’s perspective, it was converted to investment property,” Luscombe said. “However, since this was a sale to a sibling and not an unrelated person, I think that the IRS would disagree with that position.”

Filed Under: Inheritance, Q&A, Real Estate, Taxes
May 20, 2019 By

Q&A: Tax take on inherited house

Dear Liz: In a recent column, you quoted an attorney saying that if an inherited home in a trust is sold for its value at the date of death, the trust won’t owe capital gains. We sold our family’s house in 2007 within a month of my mother’s death and the government took half. Fortunately it was a really valuable house in Brentwood, but what are you talking about? I must be missing something.

Answer: If the government took half, then estate taxes — rather than capital gains taxes — probably triggered that hefty bill.

When your mother died, the estate tax exemption limit was much lower — $2 million, compared with the current $11.4 million. The top federal estate tax rate then was 45%, compared with 15% for capital gains.

Filed Under: Inheritance, Q&A, Real Estate Tagged With: , , , ,
March 25, 2019 By

Q&A: Rules for inherited property

Dear Liz: If someone owns an asset, such as a home or stocks, and passes away, the heirs can get a stepped-up cost basis. What if that same person also owned a second home, vacation property and rentals? Do those properties also get a stepped-up cost basis for the heirs?

Answer: Typically, yes. A step-up in cost basis means that the increase in value that happened during a person’s lifetime isn’t subject to capital gains taxes. Let’s say your mom bought a stock for $2 and it was worth $10 at her death. If she had sold it herself just before she died, or given it to you to sell, taxes would be owed on the $8 gain. If she bequeathed the stock to you in her will instead, you could sell it for $10 and owe no tax. If the price went up to $11 before you sold, you would owe tax on the $1 gain since her death.

The step up in basis also wipes out the need to recapture depreciation taken for rental and commercial properties, says tax expert Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. (Depreciation is the loss in value over time due to age and wear and tear. Depreciation write-offs allow owners to deduct over several years the costs of buying and improving a rental or commercial property.) If your mom owned an apartment building and wrote off the depreciation, she would need to pay depreciation recapture taxes if she sold it. If you inherit the building, by contrast, you not only don’t owe taxes on the depreciation she took, but you can start depreciating the building all over again.

There’s an important exception to these general rules, however. If your mom placed the asset in an irrevocable trust before her death, it would be treated the same as a gift when you inherit it after her death, Luscombe says. You would get her basis, which means you would owe taxes on all the gain that happened during her lifetime plus any depreciation recapture taxes when you sold the asset.

Irrevocable trusts aren’t the same as the revocable living trusts people use to avoid probate, but are sometimes used when people are trying to get assets out of their estates to reduce future estate taxes. For the vast majority, though, estate taxes are no longer an issue, so irrevocable trusts can cause potentially unnecessary tax issues.

Filed Under: Inheritance, Q&A Tagged With: , , ,
February 18, 2019 By

Q&A: Heirs need a pro to sort our tax issues

Dear Liz: I know that when a person dies, their beneficiaries typically will inherit a home or other real estate at the current market value with no taxes owed on the appreciation that happened during the person’s lifetime. Does that hold true for stocks as well?

Answer: Usually, yes, but there are some exceptions.

If the stock is held inside a retirement account such as a 401(k) or IRA, and that retirement account is bequeathed to heirs, withdrawals will be subject to income tax. The same is true for investments held within variable annuities.

Inheritors also may owe capital gains taxes on a stock’s appreciation if the stock is held in certain trusts, such as a generation-skipping trust.

And even when no taxes are owed on the gain that happened during someone’s lifetime, there may be taxes due on the gain that happens after someone inherits the stock or other property, said Los Angeles estate planning attorney Burton Mitchell.

If you’re expecting an inheritance, you’d be smart to consult a tax pro so you understand the tax bill that may be attached.

Filed Under: Inheritance, Q&A, Taxes Tagged With: , , ,
November 12, 2018 By

Q&A: Can an executor withhold a copy of a will?

Dear Liz: What rights does a sibling survivor have to get a copy of a mother’s will, if the sibling is not the executor?

Answer: From the way you phrased your question, it sounds as if your sibling is serving as executor of your late mother’s estate and refusing to let you see her will. That’s unfortunate. In many states, the executor is required to give you notice of the probate proceedings, and some states also require that you receive a copy of the will if you’re named in it or the guardian of a minor child who’s a named beneficiary, said Jennifer Sawday, an estate planning attorney in Long Beach.

If you’re not a beneficiary, you could still get a copy if the estate is probated. Probate is the court-supervised process of distributing someone’s estate. Rules vary by state, but small estates may bypass probate or qualify for a streamlined version. If formal probate is required, the case is typically opened in the county where the person died and the will becomes public record. Some county courthouses make records available online, while others require you to show up in person to request a copy of the public record.

If the executor fails to file the will or open a probate case when one is required, you can go to court to force the issue. You’ll want to discuss this option with an attorney.

The rules are different if your mother created a living trust rather than a will. Beneficiaries typically receive copies after the creator’s death, but living trusts are designed to avoid probate and don’t become public documents.

If she didn’t actually have a will or living trust, the laws of your state determine who gets what. Surviving spouses and children are usually first in line.

Filed Under: Estate planning, Inheritance, Q&A Tagged With: , ,
October 9, 2018 By

Q&A: Here’s why two siblings who inherited mom’s house should prepare for an ugly family feud

Dear Liz: My mother left her house to my brother and me. He wants to use it as a rental property. I have no interest in being a landlord or in ownership. He doesn’t want to buy me out, so I’d like to sell my half interest. What are the tax issues I need to prepare for, and does my brother need to sign any documents?

Answer: You should first prepare for an ugly family feud. If the property hasn’t been distributed yet, you’ll face a probate or trust contest over the house, says Jennifer Sawday, an estate planning attorney in Long Beach. If you’ve already inherited the home, you would need to go to court to file a real estate partition action. Either way, a court action typically forces a sale or arranges for your brother to buy you out before dividing the proceeds — minus all the attorneys’ fees, of course. (This is not a do-it-yourself situation, so you’ll both need to hire lawyers.)

That may be the best of bad options if your brother won’t see reason. Being a landlord involves considerable hassle and liability. You shouldn’t be forced into such a business — or any business — with a family member.

You can use the threat of legal action as a bargaining chip, since you both will net a lot less from your inheritance once the court gets involved. It makes much more sense for your brother to agree to a sale or get a mortgage to buy you out. Let’s hope he comes to that conclusion as soon as possible.

Filed Under: Estate planning, Inheritance, Q&A, Real Estate Tagged With: , ,
July 23, 2018 By

Q&A: Figuring the tax toll for an inherited house

Dear Liz: I inherited my home when my husband died. If I sell this house now at a current market value of around $900,000, what will be the basis of the capital gains tax? I think at the time of my husband’s death, the house’s market value was $400,000.

Answer: Based on your phrasing, we’ll assume your husband was the home’s sole owner when he died. In that case, the home got a new value for tax purposes of $400,000. That tax basis would be increased by the cost of any improvements you made while you owned it. When you sell, you subtract your basis from the sale price, minus the costs to sell the home, such as the real estate agent’s commission, to determine your gain. You can exempt up to $250,000 of the gain from taxation if it’s your primary residence and you’ve lived in the house at least two of the previous five years. You would owe capital gains taxes on the remaining profit.

Here’s how the math might work. Let’s say you made $50,000 in improvements to the home, raising your tax basis to $450,000. You pay your real estate agent a 6% commission on the $900,000 sale, or $54,000. The net sale price is then $846,000, from which you subtract $450,000 to get a gain of $396,000. If you meet the requirements for the home sale exclusion, you can subtract $250,000 from that amount, leaving $146,000 as the taxable gain.

If your husband was not the sole owner — if you owned the home together when he died — the tax treatment essentially would be the same if you lived in a community property state such as California. In other states, only his share of the home would receive the step-up in tax basis and you would retain the original tax basis for your share.

Filed Under: Inheritance, Q&A, Taxes Tagged With: , , , ,
July 16, 2018 By

Q&A: Mother-daughter drama and the financial ties that bind

Dear Liz: My mother is turning 92 this month. Due to a dispute, my mother amended her will last year and stated that my inheritance had to be used for a certain purpose.

My brother sent me the amendment and told me he will enforce my mother’s wishes. He also told me that I had to send a letter to him after my mother dies if I do not want anything from her trust. Is this accurate?

I want to put it in writing before my mother dies that I do not want a penny from her trust. I want to be completely estranged from my family and their control. Do I need a lawyer to do this, and do I have to wait until her death to put this in writing?

Answer: Consider showing the email to an experienced estate planning attorney to find out how much actual control your mother will have from beyond the grave. There may be workarounds that you (and your mother) haven’t considered.

If you decide you don’t want the money after her death, you can “disclaim” it in the letter your brother described. While it may seem more satisfying to make the point while your mother is still alive, you cannot force her to disinherit you any more than she can force you to take the money if you don’t want it.

Filed Under: Inheritance, Q&A Tagged With: , ,
April 16, 2018 By

Q&A: The ins and outs of inherited IRAs

Dear Liz: I have questions about inherited IRAs. A friend has designated me and three others as beneficiaries of her IRA. Is this to be considered community property with my husband? How can I inherit this as “sole and separate property”? Must taxes be paid on this? Also, may I give gifts of cash to relatives beforehand rather than naming them as recipients of my IRA and burdening them with taxes? If I do not name survivors to my IRA, what happens to my hard-earned money after I die?

Answer: Inheritances are considered separate property in every state, including community property states. If you commingle the funds — by depositing a withdrawal in a jointly held checking account, for example — then that money potentially becomes community property. You should consult a tax pro or financial planner about the rules governing non-spouse inheritors, since they’re somewhat complicated. You’ll pay income taxes on withdrawals from regular IRAs you inherit, but typically not from Roths.

You’re welcome to give anyone as much as you want, and they won’t have to pay taxes on the gift. You could owe taxes if you give away enough money, but that’s unlikely. You have to file a gift tax return if you give more than $15,000 per recipient in a given year, but you won’t actually pay gift taxes until the amounts you give away over that annual exclusion limit exceed your lifetime limit, which is currently $11.2 million.

If you’re concerned about taxes, though, naming people as IRA beneficiaries is often a smarter tax move than not doing so and having your estate inherit the money.

If your estate is the beneficiary, the money typically would have to be paid out to your estate’s heirs — and taxed — faster than if specific people were named. Your heirs might have to empty the account within five years, or the IRA custodian may opt to distribute the whole amount to the estate in one taxable distribution. Naming people, on the other hand, may allow the option of stretching the IRA, which means taking distributions over their lifetimes. The tax-deferred money that remains in the account can continue to grow. This is another topic to discuss with your advisor.

Filed Under: Inheritance, Q&A, Retirement Tagged With: , ,
March 26, 2018 By

Q&A: A large foreign bequest could trigger U.S. taxes

Dear Liz: I have received an inheritance of $445,000 from a relative who died out of the country. Do I have to pay income tax on this money?

Answer: If you inherited from someone who was a U.S. citizen who lived abroad, then that person’s estate may be subject to U.S. estate taxes. The estate would have to be quite large, though. In 2017, estates worth less than $5.49 million per person were exempt from the tax. In 2018, the amount was raised to $11.18 million.

If you had paid any taxes on your inheritance to a foreign government, you could take a tax credit on your U.S. tax return for that amount.

Otherwise, you probably won’t owe any taxes. The federal government and most states don’t levy inheritance taxes on people who receive bequests. The exceptions are Iowa, Kentucky, Nebraska, Maryland, Pennsylvania and New Jersey, which do levy taxes on inheritances. All exempt spouses, and some exempt other immediate relatives.

Filed Under: Inheritance, Q&A, Taxes Tagged With: , ,