Losing a loved one can be one of the hardest situations one must deal with. Not only are there the emotions of dealing with a loss, but there are also several other financial aspects that need to be resolved. Decisions on real estate could be one of those aspects. Should the family sell a property immediately? Can a surviving spouse handle the maintenance of the property? Should the property be appraised?
An appraisal can be useful in several ways. Sometimes the value of the asset is unknown, and an appraisal can help a family make decisions about the future. Maybe another family member would like to purchase the property and there is a need to decide on a purchase price. Often, beneficiaries disagree on the value of a property in a trust, especially if some of the beneficiaries live out of the area and don’t understand the complexities of the Nevada County real estate market. Or possibly there is a loan on the property, or a reverse mortgage and the family needs to know how much equity is in the property. An appraisal can help with all of these situations.
What about taxes?
There are several different types of taxes on real estate. Property Taxes in California are handled by the County Assessor. (Here’s a link to the Nevada County Assessor and Placer County Assessor). The Assessor’s Office must be notified upon the death of a property owner within 150 days of the date of death, or if the estate is probated. The Assessor’s Office is going to handle when and if a re-assessment, that could potentially impact property taxes, is required. The Assessor’s Office has a process to contest a property’s assessment including a free review. An independent appraiser can always be hired as an expert witness to contest the property’s assessment via a hearing.
Capital Gains Taxes
Whenever anyone profits from the sale of a home in California, they will probably owe some amount of capital gains tax (unless you qualify for an exclusion). Homelight.com describes capital gains as “the profits made when you sell an appreciable asset, such as a house. For example, if you buy a home for $200,000 and sell it for $500,000, then you have a capital gain of $300,000. In California, capital gains are taxed by both the state and federal governments.” Taxes range from 0% to 20% on the federal level and 1% to 13.3% on the state level. A lot goes into calculating these exact taxes, but on a $300,000 capital gains, one might expect to pay $45,000 in federal taxes and $22,500 in state taxes ($67,500 total). The $300,000 gain just became $232,500.
What is a Step-Up Basis?
What is a Step-Up Basis? As of the publication of this article, the IRS allows the basis of a real estate asset to be “stepped-up.” This means the basis for calculating the capital gains can be amended when a property is inherited. (https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances). An appraisal of the property is typically done with an effective on the date of death which establishes a new tax basis.
What does this mean to me?
Let’s suppose you and your spouse purchased a property for $200,000 in 2000. You had a wonderful life in the home, and they passed away in 2018. It’s now 5 years later and time to move on and be closer to the rest of your family so you are selling your home for $500,000. Under normal circumstances, there would be $300,000 in capital gains and you’d owe $67,500 in state and federal taxes. However, you had your house appraised as of your spouse’s date of death in 2018 and it was worth $400,000. The basis has now been “stepped-up.” Now the new capital gains would be only $100,000. In this scenario you might only owe $22,500 in state and federal taxes, not $67,500. In this example getting an appraisal saved $45,000 in taxes!
This not only applies to spouses, but all estate and trust beneficiaries. It’s always best to discuss your individual scenario with your tax professional to make the overall best financial decision.
The Bottom Line
This is a lot to digest, but in summary, having a property appraised when someone passes away can save capital gains taxes when the property is sold. Recently, I was hired to appraise a property even though the owner passed away 28 years ago. This is a much more complex assignment, but not impossible. The heir of the property was selling and just became aware they needed an appraisal.
If you have a loved one that passed away, I’m happy to discuss your scenario to see if an appraisal makes sense. I regularly complete appraisals in Grass Valley, Nevada City, Auburn and throughout the Sierra Nevada Foothills for estate and trust valuation. The IRS has very specific guidelines on who can complete appraisals for step-up basis and the procedures must be followed. I have completed hundreds of appraisals for individuals, estates, and trusts over my 20 years appraising properties. I have taken courses specifically on preparing appraisals for IRS review and have extensively reviewed IRS and California Franchise Tax Board instructions. There is always risk of an audit when it comes to capital gains and taxes, but I am confident that appraisals I have prepared will not be questioned.
DISCLAIMER: All information presented in the Nevada County Appraisal Blog is meant for educational purposes only and is NOT intended for any other use. This information is not considered an appraisal and does not support any specific value opinion or eliminate the need for an appraisal for a specific property. Please give us a call at 530-632-3428 to order an appraisal for an accurate opinion of value for a specific property.