Stepped up basis on sale of inherited prela estate

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    Stepped up basis on sale of inherited prela estate

    Good morning. I inherited rental real estate property upon my mother's death in 2010. I sold the property in 2011 for $700,000.  Shortly after her death, we had an independent appraisal done on the property, which came in at about $750,000 For purposes of calculating the stepped up basis/ adjusted basis for calculating the capital gain / loss, can I use the value of the appraisal as the starting point for my basis calculation? A friend of mine had a similar scenario and the attorney used the "assessed value" from the town as the starting point as he didnt have a valuation done on the property he inherited. It would be beneficial to use the appraised value as the assessed value by the town was about $650,000, and by using the appraisal amount, my capital loss would amount to $(50,000) versus a gain of $50,000 if I used the assessed value. Im just not sure how the IRS would accept the use of the 2 basis figures as the tax implications are quite different. Please note that my calculations are quite simplified in this example as there are other components in calculating the basis ie, improvements ,closing costs, commissions, depreciation recapture etc. In summary, can I use the appraised value as the starting point for my stepped up basis calculation or do I need to use the lower of the two? Thank you for your help.

     
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    Re: Stepped up basis on sale of inherited prela estate

    In response to JOSEPHTK's comment:

    Good morning. I inherited rental real estate property upon my mother's death in 2010. I sold the property in 2011 for $700,000.  Shortly after her death, we had an independent appraisal done on the property, which came in at about $750,000 For purposes of calculating the stepped up basis/ adjusted basis for calculating the capital gain / loss, can I use the value of the appraisal as the starting point for my basis calculation? A friend of mine had a similar scenario and the attorney used the "assessed value" from the town as the starting point as he didnt have a valuation done on the property he inherited. It would be beneficial to use the appraised value as the assessed value by the town was about $650,000, and by using the appraisal amount, my capital loss would amount to $(50,000) versus a gain of $50,000 if I used the assessed value. Im just not sure how the IRS would accept the use of the 2 basis figures as the tax implications are quite different. Please note that my calculations are quite simplified in this example as there are other components in calculating the basis ie, improvements ,closing costs, commissions, depreciation recapture etc. In summary, can I use the appraised value as the starting point for my stepped up basis calculation or do I need to use the lower of the two? Thank you for your help.

    Dear JOSEPHTK:

    Property owned by a decedent should be valued at its Fair Market Value (FMV) on the date of death for purposes of both estate taxation and as the basis to be used under income tax rules, going forward, in most circumstances (there are a few exceptions).  The rental real estate you inherited is subject to this rule (and does not fall under any of the exceptions).  People charged with administering the estate may forgo an appraisal as too costly or just from indifference.  They then choose to use the city/town’s assessed value as an alternative value to obtaining an appraisal (often to their detriment, as you have found), since the assessed value trails the market values, in most instances, and will be lower than market where values are rising.  If you have obtained an appraisal, that should definitely be the value you use to begin with.  As it is a rental property, you will need to allocate the overall value between land (which is always there and is not worn out from rental use) and depreciable property (building, paving, detached garage – if there is one, etc.), which does suffer from wear and tear under rental usage and is, therefore, subject to depreciation charges.

     Hope this helps in preparing your returns!

    Mark H. Misselbeck, C.P.A., M.S.T., Tax Principal

    Katz, Nannis + Solomon, P.C.

     

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