Question: My father bought an investment property in 2006 for $ 150,000. He put my name as a co-owner with him. His intention was that I would become the sole owner of the property after his death. He passed away late last year. Before his death, he managed the property and did everything to do with the property. He took advantage of all the tax advantages and tax deductions attached to it.
When he bought the property, he and I took out a mortgage, but the lender only used his credit to approve the loan. I never declared anything on my tax return regarding the property. With his death, I inherited his share of the property and am now the sole owner.
Do I have the home appraised or can I use online tools to determine its value? Many online websites list the home’s value at around $ 130,000. Can I use this value to define the value of the house when I ultimately sell it? Do I only get 50% of the increase value?
I would appreciate any information you can provide on this matter which can give me some insight into the tax issues involved.
A: First of all, please accept our condolences on the loss of your father. If you’ve read some of our past columns, you will know that we are not fans of the way your father has organized his financial affairs regarding this property. As a general rule, we don’t think parents should put real estate in their children’s name (even if they share ownership) just for estate planning purposes.
Let’s dive into the details: you and your father bought the property for $ 150,000. Even though your father took advantage of all the tax benefits on the property, his share of the property when he bought it was worth $ 75,000. Your share was worth the same. Your father used the property as investment property and received rent from tenants, spent money on repairs, and amortized the property on his tax returns.
When your father wrote off the property, his tax base went down. If he and you had sold the property, he would be liable for the depreciation tax that he took over the years. When he died, you inherited his 50% share of the property on a grossed-up basis.
What does it mean? You inherit his share of the property at its value at the time of your father’s death. This is generally a good thing, especially if the property in question has appreciated in value. If you inherit the property at a higher value, you only owe taxes on the increase in value from the date of your father’s death.
If you sell your father’s property about a year after his death, the sale price will fix the property’s value, so you wouldn’t pay tax on the sale from him. However, if you sold for more than the purchase price, you may owe tax on your share of the profits.
What if, as you suspect, the property is worth less than the purchase price?
If your share is worth $ 75,000 and you inherited from your father for about the same amount, and you sell it within a year of your father’s death, you probably won’t have to pay any money. taxes to the federal government on this sale. (Neither income taxes nor capital gains taxes should be due.)
On the other hand, if the value of the property has decreased, you will not benefit from an increased base but rather from a declining base. In other words, you would inherit half of the property from your father at a lower valuation. If you hold the property for another 10 years and the value suddenly skyrockets, you could be paying more tax (because you will be paying the difference between the inherited value – the reduced value – and the current sale price, regardless. either the moment). For this reason, if you aren’t selling the property anytime soon, you would want someone to tell you that the property’s value is as high as possible so that when you sell later you will be paying tax on the difference. between the increased value and the selling price of the house.
While many online websites display values, we caution readers to take those values with a grain of salt. We have seen values fluctuate wildly at times and have seen firsthand how out of base some of those valuations can be.
Your best bet is to talk to good real estate professionals in your area to get a feel for the property’s value.
There are several other tax issues and issues that could play a role in any property decision you make. So talk to your accountant, tax preparer or real estate lawyer to go over your inheritance, the base increased or reduced, and how to handle the property from a tax perspective, given that even though you have owned the property for its purchase you did not take any deduction or depreciation.
In terms of valuation, talk to several real estate agents or brokers who are active in the area where the property is located and ask them to provide a written comparative market analysis for the property. The assessment you receive and the advice of your tax preparer or lawyer will help you determine your next steps.
Contact Ilyce Glink and Samuel J. Tamkin through their website, BestMoneyMoves.com.
This article originally appeared on the Sarasota Herald-Tribune: Real Estate Matters: Heir Considering Using Online Tools to Determine Value