revocable living trust stepped up basis for house

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morganjenks
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revocable living trust stepped up basis for house

Post by morganjenks »

my daughter and I own a house jointly with rights of survivorship in Los Angeles. The house is worth about $900,000 and we own it free and clear.

IF we set up a joint revocable living trust and I die in a few years--I am 91 :D --would she get a full stepped-up basis or just a half basis because hers would not change? Would she get a full stepped-up basis if we set up an individual trust with me as trustee? I know that now, as joint tenants, she would get the house automatically without probate and estate tax, but she would only receive a 1/2 stepped up basis, as hers would not change upon my death. HERS now is only $21,000, as we bought the house in 1965, :shock: so she would owe a lot of capital gains tax! :moneybag

THANKS
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LadyGeek
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Re: revocable living trust stepped up basis for house

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (trust).
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SuzBanyan
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Re: revocable living trust stepped up basis for house

Post by SuzBanyan »

Only the portion of the property owned by the person who dies gets a stepped up basis at death. The other portion continues to have a basis equal to the purchase price plus capital improvements, minute depreciation if this is a rental property.
oyster99
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Re: revocable living trust stepped up basis for house

Post by oyster99 »

Here's an alternate scenario to consider:

If:
you were sole free-and-clear owner of the house
and you set up a living revocable trust just in your name
and you then titled your house in the name of the trust
and the trust named your daughter as sole beneficiary of the house,

then:
when you pass away, and assuming your daughter sold the house shortly after your death, the cost basis of the house for trust income tax purposes becomes the sale price of the house. Your daughter would receive the full net proceeds as an inheritance, and the final form 1041 for the trust would cause a distribution of a capital loss equal to the selling expenses (realtor commission, title company fees, etc) via a schedule K-1 to your daughter.

Maybe some of the forum's attorneys could chime in on whether there's some creative way to write the trust language so that your daughter could buy the house from the trust, if her intent is to live in the house after your passing.

The obvious issue with this is your daughter is currently joint owner, so there'd have to be confidence on her and your part on how this would end up.

I'm basing this alternative scenario on responses to my situation of my mom as sole owner of the house, titled in her individual living revocable trust, selling the house shortly after her death, distributing the inheritance proceeds from the sale of the house to beneficiaries of the trust, and the tax implications thereof. Hopefully I'm not misinterpreting anything from those responses.
adam123
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Re: revocable living trust stepped up basis for house

Post by adam123 »

I am no expert, but following up on the idea above, if your daughter does not mind putting a dent in her $11.7m lifetime gift exemption, she could gift you her 50% interest in the property. The first $16k in value would fall under the gift exclusion, and she would need to report the remaining $434k on form 709. I don’t know whether you need a formal appraisal of value or not. This gift should not trigger any federal tax payment requirements, but simply requires that she report a gift above her annual $16k exclusion.

Once gifted to you, it makes sense for you to put the property into your revocable trust with your daughter as beneficiary. This avoids probate.

Under 26 USC 1014(e), if you live longer than one year after the gift from your daughter, and she is the beneficiary, she will get a full step up. If you die within one year, she will get the basis she had. So under federal law, if you live longer than a year, that should get you to the desired full step up.

While that gift from your daughter might get you where you want under federal law, you need to consider whether you will have state law problems. There might be some big consequences in CA for a gift under prop 13. If she gifts you her 50% making you a sole owner, I don’t know if it may constitute a change of ownership, and thus a reassessment of the property under to its current market value. I don’t know if that’s true. I am no expert, maybe prop 13 is not triggered under these circumstances. Maybe 50% is not enough to trigger prop 13, or maybe another prop 13 exception applies.

If this sounds like a good path, you should consult a tax attorney to double check the circumstances, especially if prop 13 is triggered.
LeftCoastIV
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Re: revocable living trust stepped up basis for house

Post by LeftCoastIV »

Did your daughter pay any $ for her portion of the house, or was it just a gift at some point in time to add her onto the title?
SuzBanyan
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Re: revocable living trust stepped up basis for house

Post by SuzBanyan »

adam123 wrote: Thu Jan 27, 2022 5:03 am I am no expert, but following up on the idea above, if your daughter does not mind putting a dent in her $11.7m lifetime gift exemption, she could gift you her 50% interest in the property. The first $16k in value would fall under the gift exclusion, and she would need to report the remaining $434k on form 709. I don’t know whether you need a formal appraisal of value or not. This gift should not trigger any federal tax payment requirements, but simply requires that she report a gift above her annual $16k exclusion.

Once gifted to you, it makes sense for you to put the property into your revocable trust with your daughter as beneficiary. This avoids probate.

Under 26 USC 1014(e), if you live longer than one year after the gift from your daughter, and she is the beneficiary, she will get a full step up. If you die within one year, she will get the basis she had. So under federal law, if you live longer than a year, that should get you to the desired full step up.

While that gift from your daughter might get you where you want under federal law, you need to consider whether you will have state law problems. There might be some big consequences in CA for a gift under prop 13. If she gifts you her 50% making you a sole owner, I don’t know if it may constitute a change of ownership, and thus a reassessment of the property under to its current market value. I don’t know if that’s true. I am no expert, maybe prop 13 is not triggered under these circumstances. Maybe 50% is not enough to trigger prop 13, or maybe another prop 13 exception applies.

If this sounds like a good path, you should consult a tax attorney to double check the circumstances, especially if prop 13 is triggered.
I think that you have identified the downsides with the gift of the daughter’s interest in the property back to Dad: it doesn’t accomplish anything if Dad passes away within 1 year; and the reassessment of the value for property tax of the daughter’s interest in the property on the transfer to Dad. There is no exclusion on reassessment for any percentage of direct ownership; the exclusion of 50% or less applies to ownership of an entity that owns the property. So a gift by daughter to Dad of 50% of the property will result in a property tax reassessment of 50% of the property to current FMV.

As a further note, the transfer from Dad’s trust or estate to daughter after Dad’s passing will result in a further reassessment of 100% of the property tax value.

The gift by daughter to Dad of her interest in the property also means she won’t be an owner and receive rent (assuming it is not the primary residence). If it is the primary residence, then the property tax reassessment on Dad’s passing eliminates the advantage daughter would otherwise have under Prop 19 to transfer her base year value to a new residence.
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morganjenks
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Re: revocable living trust stepped up basis for house

Post by morganjenks »

I thank all of you for your input. I should clarify that in 1990 when my wife died I added my daughter to the deed as joint owner with rights of survivorship; therefore, she did not buy the house with me in 1965. My wife and I bought the house in 1965 for $21,000, so my tax basis and my daughter's is $10,500 apiece.

My daughter and I have lived continuously in the house as our sole residence since 1965. we have made no improvements other than a new driveway and roof and othe repairs, but I have been told by neighbors who have done the same that those items do not qualify as capital improvements.

I guess, from your answers, that my daughter could give her half to me but that I would have to live 1 year afterwards AND we would lose our low property tax rate of $1,050 when the house is reassessed to its market value of roughly $900,000, which would translate to a new tax rate of $9000 a year, as California taxes property at 1% of its assessed value. I do not like that option.

What would happen if my daughter married her long-time bf and he moved in with us? WOULD he get an interest in the house that thereby made him 1/3 owner? If he and she stay married for 2 years, would he then get a $250,000 if the house were sold? WOULD he and she get my stepped up basis when I DIE? IF they married tomorrow, would I have to live 2 years for my son-on-law to get these tax advantages?

I am thinking that if the house is worth $900,000 now and my daughter got married on MARCH 1, then
1. my tax basis would still be $10,500 and so would hers, but

2. her husband's would be 1/3 of the market value upon their marriage, which would be $900,000/3 = $300,000. Is that correct?

3. If I die and the house is worth $1,000,000, then
a. my daughter would get 1/2 of my stepped up value, so she would get $500,000 + her own basis of 10,500, for a total basis of 510,500. IS that right?

b. my son-in-law would get 1/2 of my stepped up value, so he would get $500,000 + his own basis of $300,000, for a total basis of $800,000? IS that right or would he and my daughter get only 1/3 of my stepped up basis, which would be $333,333?

Another scenario involves my nephew in NY. If he bestows a gift of $900,000 to me or to my daughter, he could do it tax-free and would simply file a form with the IRS--I do not know the # of the document--and the largess would be counted toward his lifetime exclusion of $11.7 million. At some point, my daughter and I could sign the house over to him; in that way, we would not owe capital gains taxes and my nephew would get the house.

Would my daughter and I have to complete gift tax documents for signing over the house to her cousin/my nephew? WOULD he, in turn, get a stepped-up tax basis?

THANKS
twh
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Re: revocable living trust stepped up basis for house

Post by twh »

Wow, that's a lot of different scenarios.

Let me ask a simpler question. What is your daughter intention with the house once you do pass away? Does she intend to live there for the foreseeable future? Is she going to sell and move somewhere else?
Luckywon
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Re: revocable living trust stepped up basis for house

Post by Luckywon »

morganjenks wrote: Fri Jan 28, 2022 2:23 pm I thank all of you for your input. I should clarify that in 1990 when my wife died I added my daughter to the deed as joint owner with rights of survivorship; therefore, she did not buy the house with me in 1965. My wife and I bought the house in 1965 for $21,000, so my tax basis and my daughter's is $10,500 apiece.

My daughter and I have lived continuously in the house as our sole residence since 1965. we have made no improvements other than a new driveway and roof and othe repairs, but I have been told by neighbors who have done the same that those items do not qualify as capital improvements.

I guess, from your answers, that my daughter could give her half to me but that I would have to live 1 year afterwards AND we would lose our low property tax rate of $1,050 when the house is reassessed to its market value of roughly $900,000, which would translate to a new tax rate of $9000 a year, as California taxes property at 1% of its assessed value. I do not like that option.

What would happen if my daughter married her long-time bf and he moved in with us? WOULD he get an interest in the house that thereby made him 1/3 owner? If he and she stay married for 2 years, would he then get a $250,000 if the house were sold? WOULD he and she get my stepped up basis when I DIE? IF they married tomorrow, would I have to live 2 years for my son-on-law to get these tax advantages?

I am thinking that if the house is worth $900,000 now and my daughter got married on MARCH 1, then
1. my tax basis would still be $10,500 and so would hers, but

2. her husband's would be 1/3 of the market value upon their marriage, which would be $900,000/3 = $300,000. Is that correct?

3. If I die and the house is worth $1,000,000, then
a. my daughter would get 1/2 of my stepped up value, so she would get $500,000 + her own basis of 10,500, for a total basis of 510,500. IS that right?

b. my son-in-law would get 1/2 of my stepped up value, so he would get $500,000 + his own basis of $300,000, for a total basis of $800,000? IS that right or would he and my daughter get only 1/3 of my stepped up basis, which would be $333,333?

Another scenario involves my nephew in NY. If he bestows a gift of $900,000 to me or to my daughter, he could do it tax-free and would simply file a form with the IRS--I do not know the # of the document--and the largess would be counted toward his lifetime exclusion of $11.7 million. At some point, my daughter and I could sign the house over to him; in that way, we would not owe capital gains taxes and my nephew would get the house.

Would my daughter and I have to complete gift tax documents for signing over the house to her cousin/my nephew? WOULD he, in turn, get a stepped-up tax basis?

THANKS
Your question is quite confusing. Your daughter's husband would not acquire any of your share in the house unless you gave or bequethed it to him. I don't follow what you are asking about the stepped up basis but IMO either you or your daughter giving any share in the home to her husband could very well turn out poorly similar to how gifting your daughter her share in the home seems to have. I wouldn't contemplate doing it because of some perceived tax benefit.
SuzBanyan
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Re: revocable living trust stepped up basis for hous

Post by SuzBanyan »

morganjenks wrote: Fri Jan 28, 2022 2:23 pm I thank all of you for your input. I should clarify that in 1990 when my wife died I added my daughter to the deed as joint owner with rights of survivorship; therefore, she did not buy the house with me in 1965. My wife and I bought the house in 1965 for $21,000, so my tax basis and my daughter's is $10,500 apiece.

When your wife died in CA, which is a community property state, you likely received a step up in basis to the FMV in 1990. Let’s say that was $150,000. When you transferred half the property to your daughter, she took over half your basis and the property tax on her half (but not yours) was reassessed.

My daughter and I have lived continuously in the house as our sole residence since 1965. we have made no improvements other than a new driveway and roof and othe repairs, but I have been told by neighbors who have done the same that those items do not qualify as capital improvements.

If you sell the house for $900,000 today, it sounds like you could exclude $250,000 in gain and your daughter could also exclude $250,000 in gain. Assuming that $150,000 value in 1990, the remaining gain on a current sale would be $150,000 ( half to each of you).

I guess, from your answers, that my daughter could give her half to me but that I would have to live 1 year afterwards AND we would lose our low property tax rate of $1,050 when the house is reassessed to its market value of roughly $900,000, which would translate to a new tax rate of $9000 a year, as California taxes property at 1% of its assessed value. I do not like that option.

There would be a reassessment, but only of the transferred half. So the increase would be less, although still probably the new amount would be at least $5000.

What would happen if my daughter married her long-time bf and he moved in with us? WOULD he get an interest in the house that thereby made him 1/3 owner? If he and she stay married for 2 years, would he then get a $250,000 if the house were sold? WOULD he and she get my stepped up basis when I DIE? IF they married tomorrow, would I have to live 2 years for my son-on-law to get these tax advantages?

If your daughter marries or not, no interest in the house will go to the boyfriend/husband unless either you or your daughter sell or gift an interest to him. Marriage as CA residents will be most helpful if your daughter (or possible son in law) pass away, because the entire interest they own jointly as community property (if any), would increase in basis to the fair market value at the time the first of them passes away.


I am thinking that if the house is worth $900,000 now and my daughter got married on MARCH 1, then
1. my tax basis would still be $10,500 and so would hers, but

As noted above, this is likely much higher for each of you; equal to 1990 FMV

2. her husband's would be 1/3 of the market value upon their marriage, which would be $900,000/3 = $300,000. Is that correct?

Only if he receives an interest from you or your daughter. He could also receive an interest if they are not married, but that is less helpful to the survivors if your daughter or her husband pass away. Their marriage probably doesn’t help you from a financial point of view.

3. If I die and the house is worth $1,000,000, then
a. my daughter would get 1/2 of my stepped up value, so she would get $500,000 + her own basis of 10,500, for a total basis of 510,500. IS that right?

Again, her basis is currently higher based on 1990 value. So the basis after your death might be more like $575,000.

b. my son-in-law would get 1/2 of my stepped up value, so he would get $500,000 + his own basis of $300,000, for a total basis of $800,000? IS that right or would he and my daughter get only 1/3 of my stepped up basis, which would be $333,333?

If your SIL owns an interest in the house, his basis will be determined in the same way as for your daughter. Note, that if you gift a part of the house to your SIL, then you will not own as much as 50% at your death and a smaller percentage will be stepped up on your death. So, if you give 1/6th to him, you will only own 1/3 on your death and only that amount will be stepped up.

Another scenario involves my nephew in NY. If he bestows a gift of $900,000 to me or to my daughter, he could do it tax-free and would simply file a form with the IRS--I do not know the # of the document--and the largess would be counted toward his lifetime exclusion of $11.7 million. At some point, my daughter and I could sign the house over to him; in that way, we would not owe capital gains taxes and my nephew would get the house.

Your nephew can give a gift and file a gift tax return if needed. However, if there is a quid pro quo, cash for house, then it is not a gift. It is a sale and you will have gains equal to cash received less the basis and the excluded amount for sale of residence.

Would my daughter and I have to complete gift tax documents for signing over the house to her cousin/my nephew? WOULD he, in turn, get a stepped-up tax basis?

If you and your daughter give a gift of the house to your nephew where nephew has not transferred any cash in exchange, then nephew will get your basis and the entire value of the house will be reassessed for property taxes. If the nephew then sells the house, unless the nephew has lived there for at least 2 years, the nephew will have substantial capital gains because he will not be able to exclude any gains as a sale of his personal residence.

THANKS
My comments are in bolder italics above.
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morganjenks
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Re: revocable living trust stepped up basis for house

Post by morganjenks »

thanks again. My daughter plans to move as soon as possible after my death. She hates the neighborhood and wants to live in FLA.

I can theoretically gift the house to my nephew or anyone, but that person cannot give me a gift before or after, as it would be considered a quid pro quo for the house. My future son-in-law does not automatically get a 1/3 share of the house by marrying my daughter. THE house is my daughter's and my separate property, but we could give him a share. HE would then have a basis that is calculated on the value of the house on the date of the gift. IF he lives in the house for 2 years, he would then get a $250,000 exclusion.

If my daughter and I add my future son-in-law to the deed, do we specify how big an interest he has? do we specify on the quitclaim deed or in a different document? WOULD adding him cause the house to be reassessed?

MY basis in the house is 1/2 of the purchase price (21,000) plus 1/2 of the value of the house at my wife's death, which was roughly 320,000. I guess that my true tax basis is really 21,000 + 160,000 = 181,000.

In a similar fashion, perhaps my daughter's tax basis is not 1/2 of MY purchase price, but 1/2 of the value of the house on the day that I signed the new deed adding her as joint tenant in 11/90, which was about 320,000. My daughter's tax basis in that case is $160,000; is that correct?
adam123
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Re: revocable living trust stepped up basis for house

Post by adam123 »

As I understand it, in CA, a community property state, the full marital property gets a step up upon the death of one spouse. So, your basis (before gifting to your daughter) got stepped up in 1990 to $320k. If you gifted 1/2 at that time, your basis (of your 1/2 interest) is $160k, and your daughter’s is $160k too. If I am wrong, someone can chime in.

I believe that your gift of $160k in value was reportable, but that’s long in the past.

Others can chime in, but would they both each be separately eligible for a $250k exclusion (total, 500k) on a sale? If both get the exclusion, on a $900k sale, you would have $320k in basis, and 500k in combined exclusions, leaving only an 80k capital gain on the sale. With state and federal taxes on the 80k gain, that would be around a 20k tax bill on a regular sale if you sold it tomorrow?

Or, I suppose if you do nothing, upon your passing, she would get your 1/2 stepped up basis at $450k plus her existing $160k basis, that would give her $610k in basis. If she is eligible for the $250k exclusion (and that’s what I don’t know), a 900k sale, less her modified basis and applied exclusion would leave only a $40k gain (610 + 250 = 860k) at sale time. I think that would leave her with a $10k tax bill to pay from the 900k proceeds. I could be dead wrong on this analysis, but if that’s right you don’t need to do anything but enjoy the e house and get a good night’s sleep.
Big Dog
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Re: revocable living trust stepped up basis for house

Post by Big Dog »

yes, in California you receive full stepped-up basis upon your wife's death. So, upon your wife's death, your basis became $320k. )Your wife died in 1990, correct?) Of that, you gifted half to your D, so now you each have a basis of $160k.

And yes, both are eligible for teh $250k exclusion or $500k total for 2.

And Adam's numbers appear correct. If the house is only worth $900k upon sale (after you are gone), the selling expenses would eat up the $40k taxable gain.
Last edited by Big Dog on Fri Jan 28, 2022 6:46 pm, edited 4 times in total.
SuzBanyan
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Re: revocable living trust stepped up basis for house

Post by SuzBanyan »

I think Adam123 is correct on the impact of a sale now or a sale after your death. Some capital gains but not huge taxes due.

If you gift a portion of the house to your SIL, you do that by a deed that essentially says Dad, who owns 1/2 of the house, hereby transfers 1/6th to SIL. If your daughter does the same, the three of you will each of you will own 1/3rd of the house. Note that the transfer to 1/3rd to SiL will result in a reappraisal of 1/3 of the house for property tax. So the property tax will likely go up several thousand dollars.

If you sell after SIL has lived in the house with you for at least 2 years, the basis for the 3 of you is still about $320k, but you will each be able to exclude $250,000 of your share of gain. With a sales price of $1,000,000, each of you will have a capital gain of $226,667, but can exclude all of that gain.

If you die, the basis for your share of the house will be stepped up. If the value at your death is $1000000, then your daughter will own 2/3 of the house and have a basis in her share of $106,667 plus $333,330, for a total of $439,667. If she sells the property immediately, her share will be $666,667, resulting in a gain of $227,000, all of which can be excluded as her personal residence.
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Lee_WSP
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Re: revocable living trust stepped up basis for house

Post by Lee_WSP »

You need to see an estate planning attorney in your state and ask these questions:

Was the title x fer a completed gift or just for convenience only?

Once this question is answered, you can proceed with a plan.

FWIW, I don’t think any state recognizes this for real estate, but it’s worth an ask.

If a completed gift, her half will remain the basis you transferred it with (the stepped up basis at your wife’s death) and your transferred half will receive a stepped up basis.
Last edited by Lee_WSP on Fri Jan 28, 2022 8:15 pm, edited 2 times in total.
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celia
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Re: revocable living trust stepped up basis for house

Post by celia »

morganjenks wrote: Fri Jan 28, 2022 2:23 pm I thank all of you for your input. I should clarify that in 1990 when my wife died I added my daughter to the deed as joint owner with rights of survivorship; therefore, she did not buy the house with me in 1965. My wife and I bought the house in 1965 for $21,000, so my tax basis and my daughter's is $10,500 apiece.
The house got a full step-in value of closer to $100K in 1990 when your wife died. You would need to get a professional historical appraisal to calculate the exact price.

I am in a similar situation with my dad dying last year, but before he died, we sold his house that he had lived in since 1955. It originally cost him $15K and the historical appraiser then calculated it's value as $60K when mom died in 1977. That is a long way from the $872K sales price in 2021 before he died, but we needed to use the money for assisted living for him and his current wife. Anyway, $60K is a better cost basis than $15K and that was a 4-fold increase in value over the 22 years mom lived there. I can give you a reference to the appraiser if you PM me since I live within the same real estate market as you.
My daughter and I have lived continuously in the house as our sole residence since 1965. we have made no improvements other than a new driveway and roof and othe repairs, but I have been told by neighbors who have done the same that those items do not qualify as capital improvements.
Replacing something that is broken or worn out does not count as an improvement, only things that add more value or functionality to the house, such as an addition or updated kitchen.
I guess, from your answers, that my daughter could give her half to me but that I would have to live 1 year afterwards AND we would lose our low property tax rate of $1,050 when the house is reassessed to its market value of roughly $900,000, which would translate to a new tax rate of $9000 a year, as California taxes property at 1% of its assessed value. I do not like that option.
Your half of the property would retain the same taxes, but her half of the house gifted to you would be re-appraised to current value. So your new property taxes would be about:
($1,050/2) + 1.2% of ($900,000/2) = $525 + $5,400 = $5,925.
I added the 0.2% for the voter indebtedness since prop 13 passed (school board bonds, fire departments, etc).

Then when you die, her property tax would be the same as yours at time of death as long as she owned it solely and lived in it, due to later propositions. But seeing that she would likely sell it instead, here's what I think would happen if you owned the entire house now:
She could sell the house she then inherits with no capital gains on her income taxes because the entire house receives a step-up in value. She could take deductions for fixing up the house and realtor commissions which then become long term capital losses. The remaining losses carry over each year and cancel any long term capital gains until the losses are used up and while $3,000 each year offsets other income.

I think the savings on the capital gains from the sale, if the whole house got a step-up in value, could more than offset any increased property tax while you are alive. You would have to compare that to the value of the house half-stepped up when you die along with profit on the gifted value for her half in 1990. I would guess that the gifted part was about half of the $100K value in 1990.
Last edited by celia on Fri Jan 28, 2022 8:24 pm, edited 2 times in total.
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Lee_WSP
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Re: revocable living trust stepped up basis for house

Post by Lee_WSP »

morganjenks wrote: Fri Jan 28, 2022 2:23 pm
1. my tax basis would still be $10,500 and so would hers, but
Your basis is actually the appraised value as of 1990, the year of death of your wife. It was community property and received a complete step up in basis at that point. So, your daughter’s basis is also the same as you transferred the property with that basis.

She probably won’t owe any capital gains if she sells it using her 500k primary residence exception plus the half step up and her much higher 1990 basis.
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celia
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Re: revocable living trust stepped up basis for house

Post by celia »

Lee_WSP wrote: Fri Jan 28, 2022 8:18 pm Your basis is actually the appraised value as of 1990, the year of death of your wife. It was community property and received a complete step up in basis at that point. So, your daughter’s basis is also the same as you transferred the property with that basis.

She probably won’t owe any capital gains if she sells it using her 500k primary residence exception plus the half step up and her much higher 1990 basis.
The 1990 step-up value upon death of his wife will be much lower than others suggested. (See my post right above yours since we were creating our posts at the same time.)

The daughter would get a $250K exemption only for the sale. If she was married and her spouse lived in the house for 2 of the previous 5 years before sale, then the exemption would be $500K.
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Re: revocable living trust stepped up basis for house

Post by Big Dog »

celia wrote: Fri Jan 28, 2022 8:32 pm
Lee_WSP wrote: Fri Jan 28, 2022 8:18 pm Your basis is actually the appraised value as of 1990, the year of death of your wife. It was community property and received a complete step up in basis at that point. So, your daughter’s basis is also the same as you transferred the property with that basis.

She probably won’t owe any capital gains if she sells it using her 500k primary residence exception plus the half step up and her much higher 1990 basis.
The 1990 step-up value upon death of his wife will be much lower than others suggested. (See my post right above yours since we were creating our posts at the same time.)

The daughter would get a $250K exemption only for the sale. If she was married and her spouse lived in the house for 2 of the previous 5 years before sale, then the exemption would be $500K.
It was the OP who suggested that the market value of the house was $320k upon his wife's death. Yes, for complete accuracy, OP could hire a firm that does historical appraisals. The rest is simple math.
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Re: revocable living trust stepped up basis for house

Post by Misenplace »

morganjenks wrote: Fri Jan 28, 2022 4:05 pm My future son-in-law does not automatically get a 1/3 share of the house by marrying my daughter. THE house is my daughter's and my separate property, but we could give him a share. HE would then have a basis that is calculated on the value of the house on the date of the gift.
This is incorrect. If you gift your son-in-law any share of the house, he takes the same basis as the gifter (you and your daughter), which is the FMV on the date of your wife's death in 1990. The giftee only gets the basis that the gift giver had.

I don't see any advantage to gifting to your son in law while you are alive, and see many disadvantages (e.g., your daughter loses half her inheritance if they break up right after you die and then he walks away with half the house). Right now as I understand it, your half will get a bumped up basis at your death, and she will only pay capital gains tax on her share of the house that exceeds her $250K exclusion. So that may be not very much capital gains tax at all- no way would I want to risk losing a $450K inheritance to an ex-spouse in order to save $15 in taxes. While we are talking about that, recommend she keep the proceeds from the house sale as her separate property, protected by a prenuptial agreement, before marrying anyone.

As they say, don't let the tax tail wag the dog. And go see a qualified estate attorney who understands tax issues.
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Re: revocable living trust stepped up basis for house

Post by SuzBanyan »

Celia: Thank you for reminding me that Prop 19 still excepts a transfer of property between a parent and child from reassessment for property tax purposes if it is a personal residence of both the transferor and transferee. As a result, there would not be any reappraisal on a transfer between Dad and daughter up to a lifetime value limit of $1 million.
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celia
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Re: revocable living trust stepped up basis for house

Post by celia »

morganjenks wrote: Fri Jan 28, 2022 4:05 pm MY basis in the house is 1/2 of the purchase price (21,000) plus 1/2 of the value of the house at my wife's death, which was roughly 320,000.
OP, Did you have the house officially appraised in 1990 and have it in writing? Your basis is half of the 1990 appraised value. The rest is gains at this point. The same holds for your daughter. But YOU don't determine the 1990 value. An appraiser does.

Please clarify.
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Re: revocable living trust stepped up basis for house

Post by crefwatch »

Is Medicaid planning a factor at all? Age and health of father?
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morganjenks
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Re: revocable living trust stepped up basis for house

Post by morganjenks »

I am impressed and grateful to all of you beyond what words can express. I should say that although I am 91 & in good health and have private health insurance from my former job with LA, who knows when I will die? I thus want to plan now so that my daughter's capital gains taxes would be minimized. Medicaid is not an issue (crefwatch).

I did not have the house appraised in 1990 when my wife died, but my neighborce with the same floor plan sold hers for $320,000. OF courfse, that information is not proof, so I will need a historical appraisal. thanks for the tip (celia).

ANother interesting, pertinent point is whether Prop 19, which passed in 11/20, allows my daughter to pass her share (1/2) of the house to me without triggering a re-appraisal or whether it only allows a transfer from PARENT to child. THe old prop 13 allowed both, which is how I added my daughter without altering our property tax assessment value with the LA county assessor, but prop 19 made some changes to the previous prop 13 of 1978. SUZBANYAN, if you and Celia are correct, then my daughter could transfer her 1/2 of the house to me, which would be worth roughly 450,000--but I will get the appraisal in writing this time!--without the 2 of losing our low assessed property taxation value of $1050. THANKS for the info there!

To add a future son-in-law is risky and not wise, as many of you mentioned, so we will not do it. My daughter would gain his $250,000 exemption upon the sale of the house, but the possible negative outcomes loom large; suppose he is sued? the house could be lost; moreover, the taxation is not that great to begin with, when the stepped up values after my wife's death in 1990 and my future death are taken into consideration.

I have read that california is a community property state, but I also have learned that such property has to be commingled; therefore, if my daughter DID get married, the house would not become community property UNLESS she physically added her husband's name to the deed, RIGHT? I will certainly tell her a. not to get married, and b. never to add anybody to the deed, even if he is a life-long 'friend with benefits' from down the street, which in this case, is true. You never can be too safe, especially when approximately $450,000 is involved (Misenplace: 'don't let the tail wag the dog'--good advice).

ALL options considered, I am now leaning toward having my daughter sign her 1/2 of the house to me and then forming a revocable living trust through an attorney. This action is predicated upon the idea that my daughter could sign her 1/2 to me, file a gift tax form with the IRS (and maybe california, although I think not), and pay no gift, AND our house would NOT be reassessed AND she would get a full-stepped up basis to FMV when I die. WOULD I still have to live 1 year from the date of transfer and the date of the registration of the revocable trust with the LA county assessor for these benefits to take effect? I have no plans to die, but I may get run over by a truck or something when I am on an evening walk. :wink:

THE whole purpose (Lee_WSP) of the initial adding of my daughter to the deed as joint tenant with rights of survivorship was to avoid probate and see that my daugther had no expenses in keeping the house and maintaining the low property tax fee each year. I never imagined that the neighborhood would turn so bad--I would move now if I could avoid paying capital gains taxes--and I never thought in 10/90 that the house would be worth so much money that my Daughter would owe capital gains tax. Perhaps congress can pass a bigger exclusion of, say, $500,000 or even $1,000,000 per owner. Oh, that is wishful thinking. :D
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