Mom's Probate-Question about her house

[anteater]

Here's what I think may be the attorney's reasoning. The property receives a step up in cost basis to the fair market value of the property on the date of death. If the property is subsequently sold, there is a possible capital gain or loss on the sale - the difference between the net sale price and that stepped up cost basis.

For real estate, there is always some guess work in establishing fair market value. Not all property is exactly the same and the market is not nearly as liquid as it is for, say, stocks and bonds.

In many probate cases, if the property is sold during probate, the actual sale price is used as the best estimate of the fair market value at the time of death. Therefore, for income tax purposes, there is no gain.

On the other hand, if $87K is established as the fair market value for probate purposes, you keep the property and subsequently sell it for $120K, there will be a gain.

Your problem appears to be that wide difference in estimates of the current fair market value. I would suggest that you have an appraisal or two performed by certified appraisers rather than using realtor estimates.

 

[hink2121]

So we don't have to use the realtors $87,000 estimate? So in our situation it would be wise to use the larger estimate($130,000)established by the other realtors even though they are from another county? It is very true that the town is a bedroom town and has always reflected higher prices even though mom's town is in another county.

She is only a 14 mile trip to the larger town. 90% of the people work in town work at the larger town. It's been that way for over 50 years. So my sister and I do have a choice on what figure we want to use? So you say to go with 2 certified appraisers and get a more accurate figure for the house. Can they be out of the county where the house is located?

So let's say they both come in with a figure of $120,000 for the value and a year later we get $105,000 for the house we pay no capitol gains? If this is true we would be foolish to go with the $87,000 figure. It's just a very unique situation where this town is located and prices for housing in this town are much higher than the rest of the county.

Again,it's always been like that. Thanks for your help. We'll get this figured out. When you have 2 realtors giving you a price of the $130,000 range and the other one quotes you $87,000. Way to much of a spread.

 

[tranquility]

You have to prove up the basis. Realtor's comps are not going to prove it up, especially when you have such a wide range. We use qualified appraisals when big money is involved. Here, you better have more than an estimate.

 

[hink2121]

So you say to get 2 appraisals and really to forget the realtors figure of $87,000? The lawyer said he needed figures from a realtor from the county that the house is located in. We said yes to go ahead and use that($87,000)figure. But you are saying we can change our mind and go ahead and pay for a couple of appraisal's and go with those numbers?

Can the appraisal's be done by people that are out of county? And let's say my sister want's to buy the property for $110,000(we both agree on this price) does that figure become the new appraisal(up basis?)? Also if she does buy it does any money have to change hands? Because basically we both are the owners.

We would be paying ourselves. So what we want is paperwork wise to show that my sister is the legal owner of the property. That way we could take our time with the house and possibly sell it a year down the road. We may even want to rent it out. Many thanks for your input.

 

[tranquility]

I do taxes. We do a lot of estate and trust returns where property basis is important. However, our clients are usually dealing with millions and not thousands of dollars and they want to be sure. To be sure, you need a "qualified appraisal". They are expensive. What you are calling "appraisals" are really just Realtor comps. You have two. They are widely varying. If the IRS questions you on basis, you have to prove it up.

One of the comps you have are from local real estate agents and the other is from agents from the big city. I think the best proof would be from the local agent, but even then, you might have to counter the IRS if they disagree.

But, the Supreme Court has declared an arms length sale is the fair market value of a property. If you buy the property from sister (Or, vice versa.), the amount paid will be the FMV for that portion and you could extend the amount to the basis for the whole property if the sale was withing six months of death of the owner. While there could be an argument the sale between sisters is not at arm's length, I would bet the IRS would accept a purchase by one under the facts listed as establishing proper basis.

 

[anteater]

Who is the executor of the estate? The attorney? If it is one or both of you, remember who calls the shots.

The stuff about "...from the county that the house is located in" is artificial. Certainly, someone in the general area is better suited to make an appraisal, but there is nothing sacred about lines drawn on a map.

In most cases, one wants the highest realistic and defensible appraisal possible if the property will be sold in order to establish a higher cost basis.

Because basically we both are the owners.

We would be paying ourselves. So what we want is paperwork wise to show that my sister is the legal owner of the property. That way we could take our time with the house and possibly sell it a year down the road. We may even want to rent it out. Many thanks for your input.

You do realize that you are all over the place here, don't you?

 

[hink2121]

Both my sister and I are the executors. Thanks for all your help. I have a much better explanation of the process. Will continue on now that I know what questions to ask.

 

[hink2121]

Update. My sister and I have decided not to sell the house. In that case the lawyer said a Tenants in Common should be drawn up. Was advised to pick a high value for the house to reduce the likelihood that anyone would have to pay capital gains when it is sold. Then he said the probate process can come to a close when this is done.

 

[tranquility]

It is to your benefit to get the highest step-up in basis as possible. No one would ever "pick" anything but the highest value. At some point, you may have to prove it. Make sure you have the facts to back up the basis claim years in the future.

 

[hink2121]

When you say future do you mean when the time comes that my sister and I do decide to sell the house? I can see that we probably won't put it on the market for at least 12 months. What would happen if we set the price to high now and the actual price we get for it is 5-$10,000 less? Thanks for your help.

 

[anteater]

When you say future do you mean when the time comes that my sister and I do decide to sell the house? I can see that we probably won't put it on the market for at least 12 months. What would happen if we set the price to high now and the actual price we get for it is 5-$10,000 less? Thanks for your help.

Then, you might have a capital loss.

Which is a reason why you should take what Tranquility said seriously:

At some point, you may have to prove it. Make sure you have the facts to back up the basis claim years in the future.

I start getting this itch when you use terms like, "... set the price ..." Just the facts, ma'am.

 

[hink2121]

Mom's house property tax wise is valued at $104,000. It say's on her property tax statement that this is a fair market value. I'm thinking the way to go is to stay close to that number. Good idea?

 

[tranquility]

The IRS will never challenge the property tax amount. Why? It is historically below the value of the property. (With the market today and the time lag, I can't say this is still true. I haven't done a bunch of calculations to see this year.)

I suspect the valuation of the property tax is too low and would cost thousands in taxes at a later date. (Unless the home is going to be used as a...well, home.)

 

[hink2121]

The one realtor said she would start out with a asking price of $125,000 to $130,000. As mentioned property tax value is $104,000. Should I tell my lawyer to use a figure closer to $125,000 or $104,000? Please keep in mind it's at least a year down the road until we decide to sale it. Thanks!

 

[tranquility]

I'm out. Good luck with whatever facts you make up.