Clarification on estate taxes?

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percy
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Clarification on estate taxes?

Post by percy »

I have an accountant I'll be consulting with, but want to try to understand the situation better before discussing this with them (while the meter's running), and I know there are well-informed folks here.

A parent died last August; their Texas house was in a revocable living trust. I'm the executor of the estate, in charge of selling house and its contents (art/antiques). The total assets will be much, much less than 11 million.

I'm finding mixed information on whether there will be any taxes due on this sub-11 million dollar estate. Some questions:

1) Any capital gains or any other taxes on sale of the house? If so, I assume cost basis would be stepped-up to time of death?
2) If there are capital gains on house, and the value appreciated from time of death to house sale date, is there any grace period, where gains/appreciation wouldn't be charged? If house was sold 6 months, or 1 year after death, would it be required to determine if value increased?
3) Same questions as above, but applied to contents of house: art and antiques which are being sold to auction houses, etc. Any capital gains or other taxes?
JoinToday
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Re: Clarification on estate taxes?

Post by JoinToday »

A. I am not sure an accountant is the right person to ask; lawyer is probably better.

B. If the house is in a trust, I assume you are the trustee. The executor of the estate is separate from the trustee of the trust. The trustee is the one that will be selling the assets in the trust.

1. Correct
2. I think there is wiggle room on the valuation. I have heard that if the house sells within 6 months or 1 year of the date of death, you can reasonably claim that the selling price is the value at the date of death. Might be harder to defend if the price of housing is increasing dramatically, but it is a reasonable claim to make. You only have to justify the claim if you or the trust tax returns get audited (I believe). But you can get an appraisal of the value at the date of death; maybe a realtor can give you a valuation -- and this is somewhat subjective. Maybe his estimate is on the high side, but defend-able.
3. Same thing with art, antiques. You are suppose to pay tax on gains after the date of death. This is easy to do with investments (mutual funds, stock, bonds) where daily prices are published. With artwork? You have latitude, as long as the number you use are reasonable and defend-able.

You can deduct the cost of selling: escrow fees, realtor fees, some maintenance fees until the house is sold, etc. So if the house sells for $500K, and escrow, realtor, etc fees were $50K; perhaps you can reasonably claim the house value at the date of death was $500K, and you can claim a $50K loss. [I am not a lawyer, but this is my understanding]
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water2357
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Re: Clarification on estate taxes?

Post by water2357 »

Everything is appraised/valued as of the date of death. There is no other date used. When sold, any gain(loss) would be based on the difference in value between the date of the sale and the value as of the date of death, which is now the cost basis for the asset. Any estate or inheritance tax is based on the value of the asset as of the date of death. Any income tax after the date of death is based on the gain(loss) as just stated, i.e. value at date of sale vs value at date of death, plus of course any additional income earned on investments. If there are any exceptions, perhaps others on the forum will add clarification for specific situations.
water2357
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Re: Clarification on estate taxes?

Post by water2357 »

In some States that assess property taxes, the State will have assigned a value to the property. Often that value can be used in lieu of an appraisal, which may or may not work out in your favor depending on how the housing market has changed since the State assigned the value. And expenses are generally deducted from the sales price. The executor of the estate should be working with a lawyer with knowledge of settling estates for the particular State involved.
Topic Author
percy
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Re: Clarification on estate taxes?

Post by percy »

I am not sure an accountant is the right person to ask; lawyer is probably better.
Ah, I have an estate lawyer I can also consult with about this; I had assumed that the tax issues would be for an accountant, but apparently not necessarily...
MightBeRight_MightBe
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Re: Clarification on estate taxes?

Post by MightBeRight_MightBe »

water2357 wrote: Thu Jan 20, 2022 11:56 pm Everything is appraised/valued as of the date of death. There is no other date used.....
Not quite right. There is a method for "alternate valuation" which is sometimes thought of as 6 months after the date of death. There are more details than that. But it might help in times of rapidly changing values.

You can read more about it in the IRS instructions for form 706.
Gill
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Re: Clarification on estate taxes?

Post by Gill »

MightBeRight_MightBe wrote: Fri Jan 21, 2022 2:04 am
water2357 wrote: Thu Jan 20, 2022 11:56 pm Everything is appraised/valued as of the date of death. There is no other date used.....
Not quite right. There is a method for "alternate valuation" which is sometimes thought of as 6 months after the date of death. There are more details than that. But it might help in times of rapidly changing values.

You can read more about it in the IRS instructions for form 706.
Alternate valuation is only applicable when it reduces the value of the estate and the estate tax due. That does not appear to be the situation here.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
senex
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Re: Clarification on estate taxes?

Post by senex »

OP, for what it's worth, I recall hearing from several lawyers that if you sell illiquid assets (houses, art, etc) reasonably close after date of death, then it's reasonable to use sale price as the stepped-up basis (i.e. recognize zero gain). The reason, I suppose, is that an "estimate" on a certain date is no more indicative of true value than an arms-length transaction a few months later.

The more time passes, the harder it is to make that case. If a lot of time has passed, consider a short attorney consultation.
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Lee_WSP
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Re: Clarification on estate taxes?

Post by Lee_WSP »

Accountants do not typically deal with estate and gift taxes. Trust and estate lawyers do, as do large accounting firms.
Last edited by Lee_WSP on Fri Jan 21, 2022 1:10 pm, edited 2 times in total.
bsteiner
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Re: Clarification on estate taxes?

Post by bsteiner »

senex wrote: Fri Jan 21, 2022 12:22 pm OP, for what it's worth, I recall hearing from several lawyers that if you sell illiquid assets (houses, art, etc) reasonably close after date of death, then it's reasonable to use sale price as the stepped-up basis (i.e. recognize zero gain). The reason, I suppose, is that an "estimate" on a certain date is no more indicative of true value than an arms-length transaction a few months later.

The more time passes, the harder it is to make that case. If a lot of time has passed, consider a short attorney consultation.
That's usually the case, but sometimes the market changes substantially. A property in lower Manhattan may have been worth substantially less on September 12, 2001, than on September 10, 2001. A property in Manhattan may have been worth substantially less in the fall of 2020 than in February 2020. A property in the NYC suburbs may have been worth substantially more in July 2021 than in January 2021.

Also, fair market value is what a hypothetical willing buyer would pay and a hypothetical willing seller would accept. We've had these cases:

1. An apartment that was sold to the owner of an adjacent apartment who wanted to combine the two apartments. That buyer was willing to pay more than fair market value.

2. A 2-unit brownstone where the decedent occupied one unit and a tenant occupied the other unit, and the tenant moved out shortly after death. The house was worth more vacant than with a tenant since a buyer might want to combine the two units.

3. A small apartment building where the buyer paid more than it was worth.

4. A commercial property that was sold to the owner of an adjacent property.

5. A large apartment that was sold to a buyer who previously lived in that building and wanted to buy in that building and was willing to pay more than fair market value.
Lee_WSP wrote: Fri Jan 21, 2022 12:47 pm Accountants do not typically deal with estate and gift taxes. Trust and estate lawyers do as well as large accounting firms.
Not merely as well. Much better.
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Lee_WSP
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Re: Clarification on estate taxes?

Post by Lee_WSP »

I edited my previous reply to fix some grammar issues.

Large accounting firms will have a unit or person who deals with these issues. That's all I was saying. I defer to Bruce as far as how competent they may be.
Topic Author
percy
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Re: Clarification on estate taxes?

Post by percy »

Update: one thing that was confusing me; I'd been advised that there would be no estate tax due, since the assets of the estate are far less than 11 million, which is roughly the threshold for the federal estate ("death") tax, IRS form 706. However, apparently I do need to file a 1041 form for the estate, for income earned.

I'll be selling the house probably sometime later this year, but in the meantime there is an enormous collection of art and antiques. I got the entire collection professionally appraised, but not itemized values for every item (there are thousands of items; at the time I ran this by my estate attorney who said that should be fine, no need to appraise individual items). I sold several thousand dollars worth of items from this collection in 2021, and will be selling the bulk of it in 2022.

Anyone know how capital gains are determined for items like this? Presumably the value of the items didn't increase in value in a few months, or at least probably not by much. All of the income from sales is going to the estate bank account, none will be spent, it will all be distributed to the beneficiaries.
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