Selling a fire damaged inherited property

[knash5]

California.

Hi, so my uncle and his son sadly passed away in a house fire about a year ago. His house was in a trust which was left to his sister (my Mom) so nothing too complicated there. Obviously we are now attempting to sell the property but know that it isn't worth the market value due to the condition of the property (it would need to be completely gutted) and are targeting a developer who will buy the property due to the value of the lot and knock the house down.

The house at last market value was worth around 500k and a developer has offered us 250k because he says it'll cost him 200k to build a new house and the fact that death occurred there makes it harder to sell on. He also said if we sold it for a lot more than 250k (I personally was hoping we could get about 350k for it) the capital gains tax would mean we probably wouldn't be left with much more than 250k anyway.

So I have some questions; Am I correct in thinking that the capital gain rules for an Inherited Property are different and they don't count what the property was originally purchased at (I believe to be around 30k in the 70's) but what is it worth at the time it is Inherited? If so then capital gains should not really affect us? How do we even work out the value of the property in this condition for capital gains?

Also, is it correct that the 3 year disclosure is from the date of death? In which case we'd only have 2 more years before it doesn't have to be disclosed?


I know that nobody here can give me an accurate assessment of the value of the property but I have no idea whether 250k is a fair offer considering the damage or the lots value means we should be able to command a lot more. Anyone with any experience in selling fire damaged properties that could give me some advice would be appreciated.

Thanks!

 

[HRZ]

Fair is in eye of beholder ...and depends on your negioation skill set in that market.

I have no idea about the capital gains situation ...key is the inherited basis ...it may be all smoke . What is Moms basis in this home ?

I suspect with a new home a prior death is a non issue .

What's going on in that neighborhood..not far from me folks buy $ 350 k homes to tear them down for $1 million homes The developers math does not make sense but that's not your concern.

Get more local input .

BTW , Mom must use competent counsel is any such deal ....before she signs anything!

 

[LdiJ]

California.

Hi, so my uncle and his son sadly passed away in a house fire about a year ago. His house was in a trust which was left to his sister (my Mom) so nothing too complicated there. Obviously we are now attempting to sell the property but know that it isn't worth the market value due to the condition of the property (it would need to be completely gutted) and are targeting a developer who will buy the property due to the value of the lot and knock the house down.

The house at last market value was worth around 500k and a developer has offered us 250k because he says it'll cost him 200k to build a new house and the fact that death occurred there makes it harder to sell on. He also said if we sold it for a lot more than 250k (I personally was hoping we could get about 350k for it) the capital gains tax would mean we probably wouldn't be left with much more than 250k anyway.

So I have some questions; Am I correct in thinking that the capital gain rules for an Inherited Property are different and they don't count what the property was originally purchased at (I believe to be around 30k in the 70's) but what is it worth at the time it is Inherited? If so then capital gains should not really affect us? How do we even work out the value of the property in this condition for capital gains?

Also, is it correct that the 3 year disclosure is from the date of death? In which case we'd only have 2 more years before it doesn't have to be disclosed?


I know that nobody here can give me an accurate assessment of the value of the property but I have no idea whether 250k is a fair offer considering the damage or the lots value means we should be able to command a lot more. Anyone with any experience in selling fire damaged properties that could give me some advice would be appreciated.

Thanks!

There was no insurance on the house to be used to make the repairs?

In any case, he is completely wrong about the capital gains. The property got a stepped up basis to fair market value as of the date of death, therefore if anything, your mother will likely have a capital loss rather than a capital gain.

 

[xylene]

Don't listen to the guy who wants to make money on your property for advice.

Because his tax thing is just stupid drivel. You don't lose money by selling for more.

And his 'people died' business: That so sad about your family members. But their is no such thing as ghosts, and a completely redeveloped property is not going to be worth less because of a death. So smack that baloney out of any would be buyer's mouth.

Land in California is extremely valuable. Consider to get someone professional you trust to help with this deal as you could be leaving 100k or more on the table.

 

[Taxing Matters]

In any case, he is completely wrong about the capital gains. The property got a stepped up basis to fair market value as of the date of death, therefore if anything, your mother will likely have a capital loss rather than a capital gain.

I agree with that if the property was held by a grantor trust created by the uncle at the time of the uncle's death. A revocable trust is the most common of the grantor trusts and is the most common trust used in estate planning today. So I can understand the temptation to assume that this was a grantor trust. But we don’t know the trust details. All that the OP has said is that the home was held by a trust. If that trust was not a grantor trust then the tax picture will be significantly different.

 

[not2cleverRed]

Per posting history, uncle had an irrevocable trust. https://forum.freeadvice.com/threads/settling-up-a-trust.638387/ :shrug:

Not that the irrevocable trust necessarily has anything to do with the house.

People do let their insurance lapse - there's no insurance payout if the insurance lapses. Sometimes conditions exist that are not coverable by insurance, or at least difficult to do so affordably. And even if there is an insurance payout, some would rather pocket the money rather than rebuild.
I'm going to agree that the sale price of a *new* house should not be affected by deaths in the previous structure. We are not talking Amityville Horror here!

 

[LdiJ]

Per posting history, uncle had an irrevocable trust. https://forum.freeadvice.com/threads/settling-up-a-trust.638387/ :shrug:

Not that the irrevocable trust necessarily has anything to do with the house.

People do let their insurance lapse - there's no insurance payout if the insurance lapses. Sometimes conditions exist that are not coverable by insurance, or at least difficult to do so affordably. And even if there is an insurance payout, some would rather pocket the money rather than rebuild.
I'm going to agree that the sale price of a *new* house should not be affected by deaths in the previous structure. We are not talking Amityville Horror here!

The were just setting up that trust in September of 2017 and in this thread he said that his uncle died a year ago, so I am guessing that the irrevocable trust was previously a revocable trust that became irrevocable upon his death. It would be kind of odd to have two different trusts. Not completely outside of reality, but still a bit odd.

 

[not2cleverRed]

The were just setting up that trust in September of 2017 and in this thread he said that his uncle died a year ago, so I am guessing that the irrevocable trust was previously a revocable trust that became irrevocable upon his death. It would be kind of odd to have two different trusts. Not completely outside of reality, but still a bit odd.

Not really. I know family members who have more than one trust.

 

[knash5]

Thanks for the replies. I'm not totally sure about the house insurance side of things. That is a good question!

As for the trust, my understanding is that my auntie and uncle set up a revocable living trust that become irrevocable in 2007 when my Auntie passed. Does that mean we wouldn't be exempt from any capital gains?

 

[Taxing Matters]

As for the trust, my understanding is that my auntie and uncle set up a revocable living trust that become irrevocable in 2007 when my Auntie passed. Does that mean we wouldn't be exempt from any capital gains?

If the trust that now holds the home became irrevocable in 2007 and there are no other features of the trust that would have kept it a grantor trust then there was no step up in the basis of the property when your uncle died. Whatever the adjusted basis of the property was just before he died will continue to be the basis after his death. So at the very least the post-2007 appreciation (which could be considerable in some areas) could result in a capital gain on which tax must be paid.

It is exactly this sort of thing that I resisted assuming it was a revocable trust at the time your uncle died. It is always important to review the exact facts of the trust to determine the tax consequences.

 

[knash5]

Ok so for clarification, you’re saying that the capital gains would be considered from 2007 when auntie passed rather than 2017 when uncle passed? Or do you mean the gain will start from when the house was purchased?

 

[Taxing Matters]

Ok so for clarification, you’re saying that the capital gains would be considered from 2007 when auntie passed rather than 2017 when uncle passed? Or do you mean the gain will start from when the house was purchased?

When your aunt died in 2007, what happened to the basis in the property will depend on how it was held at the time she passed. I'm going to assume that they lived in California and that the home was also in California. If the facts are different then the answer may change slightly. While the home was legally held in the trust, under federal tax law a grantor trust is basically ignored and the property treated as though the grantors of the trust (your aunt and uncle) still owned the property directly. So you’d look here to how the property would be regarded if the trust had not taken title to it.

If the home was held by them as community property then the entire property got a step up in basis to the fair market value (FMV) of the home on the date of her death in 2007.

If the home was NOT community property, however, then the answer changes a bit depending on how the home was held:

• If your aunt and uncle jointly owned the property, either as joint tenants with a right of survivorship JTWROS or as tenants-in-common (TIC), then generally only half the property gets a step up in basis to fair market value when your aunt died, and the other half keeps the same basis as before she died.
• If your uncle was the sole owner of it, then there was no step up in basis at all when your aunt died.
• If your aunt was the sole owner of it, then the entire property would get a step up in basis to FMV when she died.

Once you determine the basis for 2007 when she died, you then make any adjustments in basis for things that occurred after, like improvements to the property, any depreciation taken, etc. The result is the adjusted basis of the property now. Your gain (or loss) will be the sales price of the property (less selling expenses) minus that adjusted basis.

 

[HRZ]

Your capital gains situation. Is NOT a good excuse to accept a low price for the home

 

[knash5]

When your aunt died in 2007, what happened to the basis in the property will depend on how it was held at the time she passed. I'm going to assume that they lived in California and that the home was also in California. If the facts are different then the answer may change slightly. While the home was legally held in the trust, under federal tax law a grantor trust is basically ignored and the property treated as though the grantors of the trust (your aunt and uncle) still owned the property directly. So you’d look here to how the property would be regarded if the trust had not taken title to it.

If the home was held by them as community property then the entire property got a step up in basis to the fair market value (FMV) of the home on the date of her death in 2007.

If the home was NOT community property, however, then the answer changes a bit depending on how the home was held:

• If your aunt and uncle jointly owned the property, either as joint tenants with a right of survivorship JTWROS or as tenants-in-common (TIC), then generally only half the property gets a step up in basis to fair market value when your aunt died, and the other half keeps the same basis as before she died.
• If your uncle was the sole owner of it, then there was no step up in basis at all when your aunt died.
• If your aunt was the sole owner of it, then the entire property would get a step up in basis to FMV when she died.

Once you determine the basis for 2007 when she died, you then make any adjustments in basis for things that occurred after, like improvements to the property, any depreciation taken, etc. The result is the adjusted basis of the property now. Your gain (or loss) will be the sales price of the property (less selling expenses) minus that adjusted basis.

I am looking at the trust to try and work out how the home was held. The schedule A Trust Assets state that the Grantors 'hereby transfer the following property into the trust estate' and the quit claim deed from 2006 states the couple as joint tenants when they transferred the property into the trust but the Property Detail report lists my Uncle as the Owner. The sales history shows the buyer as the trust in 2006 but then my uncle as the buyer in 2008 after my auntie had died. Does any of this give a clear picture as to how the home was held? Thanks.