Ask Liz Weston

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Real Estate

Q&A: Should I get a home appraisal when my spouse dies?

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Dear Liz: When one spouse dies, the couple’s primary residence gets a step-up value to the current market value (in California). So how is that value established for future reference? Is it necessary to get a formal appraisal or are current sales comparisons sufficient? Also, is that step-up value the basis for any future home sale or would the sale have to happen in a certain time frame?

Answer: It’s a good idea to get a formal appraisal after a spouse dies to establish the home’s value and potentially reduce future taxes. There’s no deadline for using this new tax basis, but surviving spouses who sell within two years of the death can get the full $500,000 capital gains exclusion available for couples. After the two-year mark, survivors would be limited to the individual $250,000 limit.

Here’s a quick primer on how step-up works. In every state, the deceased spouse’s half of jointly owned property gets a new value for tax purposes. This step-up in tax basis means that no capital gains taxes will be owed on the appreciation that happened during the deceased spouse’s ownership, at least on 50% of the property.

In community property states, both halves of the property typically get this valuable step-up in basis at the first spouse’s death. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

If an appraisal wasn’t ordered soon after a death, getting a formal valuation can be somewhat more complicated. Your estate planning attorney may be able to guide you to appraisers experienced in retrospective valuations.

Q&A: Should I get Medicare supplemental insurance?

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Dear Liz: I’m about to retire and have decided on original Medicare with a Medigap policy rather than Medicare Advantage. Can a Medigap company cancel your medical plan, and can they deny a medical procedure? Are there extra charges for preexisting conditions or other coverage issues?

Answer: Medigap is another name for Medicare supplement insurance. This coverage is provided by private insurers to help pay out-of-pocket costs such as deductibles, co-payments and co-insurance for treatments approved by Medicare.

If you apply for a Medicare supplemental policy during your initial enrollment period, you have something known as “guaranteed issue rights.” The insurer offering the policy can’t deny coverage or charge you extra for preexisting conditions. If Medicare approves a treatment or procedure, the supplemental coverage applies — the insurer can’t independently decide to deny you.

If you miss that initial enrollment period, however, you may be subject to medical underwriting. An insurer can charge you more, impose waiting periods or refuse to issue you a policy.

Your initial enrollment period typically starts when you turn 65 and sign up for Part B, the part of Medicare that covers doctors’ visits. If you delay Part B because you have employer-provided health insurance, then the six-month open enrollment period will start after you sign up for Part B. (You have eight months after your employer coverage ends to enroll in Part B without penalty.)

An insurer can cancel a Medigap policy only if you stop paying your premiums, you provide false information on your application or the insurer becomes insolvent. If you lose your coverage through no fault of your own, you would have guaranteed issue rights to buy a Medigap policy from another insurer.

Q&A: Beware of transferring a home’s title before death

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Dear Liz: I am in my late 70s. My husband is in his mid 80s and in poor health. Are there advantages to transferring the title to our house into my name alone so I can be the sole owner?

Answer: Owning the house solo could make it easier for you to sell or refinance without your husband’s involvement.

But you would miss out on a significant tax break. At least one half of the property — and both halves in community property states — get a new value for tax purposes when a spouse dies. This “step up” in tax basis can reduce or eliminate capital gains taxes when the house is sold.

There could be additional drawbacks, depending on where you live and your circumstances. A tax pro or an estate planning attorney can give you personalized advice.

Q&A: Should I take a bridge loan to build an ADU?

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Dear Liz: We live in a high fire risk area and feel it is too risky to keep our home. Our daughter and her husband invited us to build an accessory dwelling unit on their property. With the tariffs, it is estimated the construction will cost about $600,000. We have a nest egg of about $1.3 million and could sell our current home for about $1 million (we still owe $235,000 on the mortgage).

Our advisor at the bank has recommended a “bridge loan” to pay for the construction, or we could use the money from the sale of our home and our savings, which makes us nervous. I know we need advice but are unsure where to turn.

Answer: You aren’t really facing a choice between financing the ADU and using your own resources. You’ll pay for it either way.

Bridge loans are short-term financing that typically must be repaid within a year, at most. Presumably, you would use your nest egg and/or your home sale to do that.

Another financing alternative would be a home equity line of credit or home equity loan, using your current home as collateral. The interest rate would be somewhat lower, and you wouldn’t be under the same time pressure to pay off the loan in case construction takes longer than expected. Still, the loan would need to be paid back, so the debt will reduce your resources.

If you were building or buying a replacement home, you could get a mortgage to pay off the bridge loan. But in this case you are probably pouring money into someone else’s property. Your daughter and her husband likely would own the structure that you build.

That’s not to say this is a bad idea — far from it. ADUs can help bring families closer and make caregiving easier, while allowing each generation some privacy. But understanding how this works — who pays and how, who benefits and how — can help with decision-making.

So yes, you need advice, and lots of it. You should be talking to a lawyer, a tax pro and a financial advisor who is a fiduciary (someone who is obligated to put your best interests first).

The lawyer can discuss ways to protect your investment in the ADU. The tax pro can advise you about the various tax consequences, including the likely bills for tapping your nest egg and selling your home.

A fee-only financial planner can discuss the options with you to figure out the best course. If you don’t already have an attorney and a tax pro, the planner can give you referrals.

Q&A: Losing a home in a fire, then being hit with a ‘casualty gain’

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Dear Liz: My house was burned down in the Palisades fire. I lived in the house for 25 years and lost everything. I thought there may be a silver lining with tax deductions. Much to my surprise, I am supposed to use the purchase price from 25 years ago as my adjusted cost basis. The insurance settlement is not going to be enough to rebuild but is more than my cost basis. I will end up with “casualty gain” instead. Is this possible?

Answer: After losing your home and finding out you were underinsured, the news that you might have a taxable gain must have been a gut punch.

The IRS calls it an “involuntary conversion” when your property is destroyed and you receive insurance proceeds. If the insurance payment exceeds your tax basis in the property, that’s known as a casualty gain.

You can defer tax on this gain if you use the insurance payout to rebuild or buy a replacement property, says Mark Luscombe, a principal analyst with Wolters Kluwer Tax & Accounting. Normally you’d have two years to use the insurance proceeds, but in a federally declared disaster such as the Los Angeles fires, the deadline is extended to four years.

The IRS may be willing to further extend the deadline under some circumstances, such as contractor delays, Luscombe says. But don’t count on an extension if you’re simply unable to find a replacement property.

If you do purchase a new home elsewhere, any gain from the sale of the lot where your previous home stood also would have to be reinvested in the new home to avoid a current tax on the gain, Luscombe says.

However, the home sale tax exclusion also applies to involuntary conversions. The exclusion allows you to shelter up to $250,000 of gains ($500,000 if married filing jointly) on a sale or involuntary conversion, as long as you’ve owned and lived in the property as your primary residence for two of the last five years. So you could exclude that amount of gain and defer the rest if you rebuild or find a replacement property, Luscombe says.

This is complicated territory, so please make sure you hire a tax pro to guide you.

Q&A: Sale of last home can trigger capital gains taxes

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Dear Liz: I am 74 and my husband is 68. We have decided to sell our last home and rent. Do we have to pay taxes, specifically capital gains, on the sale of our last home or are we able to keep the sale proceeds in full?

Answer: Any home sale is potentially subject to capital gains taxes. Your gain is determined by subtracting your tax basis — the price you paid for the home, plus any qualifying improvements — from the net sales proceeds. If you owned and lived in the home as your primary residence for at least two of the previous five years, you can exclude up to $250,000 (or $500,000 if married filing jointly) of home sale profits. You would owe taxes on the capital gains that exceed those limits.

A large-enough capital gain could affect how much you pay for Medicare. The “income-related adjustment amount,” or IRMAA, is based on your income two years prior, so a big gain in 2025 could increase your premiums in 2027.

You’d be smart to talk to a tax pro before you sell so you understand the ramifications.