Inherited Property Basis

[JohnH]

I saved this one for after tax season, although it may be a no-brainer for some of you tax whizzes. Figures are rounded and transaction costs are omitted for simplicity. There are no estate tax issues involved. This is a real-life situation.

A parent dies testate, leaving 80% ownership of their home to taxpayer and the other 20% to the taxpayer's brother. The home is listed on the initial estate inventory at $140,000.

About a month after the death, the taxpayer buys out his brother's interest by pricing the home at $160,000 & paying the brother $32,000. (Brother needs the cash and taxpayer wants to handle the fixing up & sale of the home without the involvement of the brother)

About 3 months later, taxpayer sells the home for $150,000 to an unrelated third party.

Anybody have any suggestions on how basis and capital gain should be reported by taxpayer and the brother? Would it make any difference if the sale of the residence to the third party took place after the alternative valuation date?

[ChEAr$]

A parent dies testate, leaving 80% ownership of their home to taxpayer and the other 20% to the taxpayer's brother. The home is listed on the initial estate inventory at $140,000.

About a month after the death, the taxpayer buys out his brother's interest by pricing the home at $160,000 & paying the brother $32,000. (Brother needs the cash and taxpayer wants to handle the fixing up & sale of the home without the involvement of the brother)

About 3 months later, taxpayer sells the home for $150,000 to an unrelated third party.

Anybody have any suggestions on how basis and capital gain should be reported by taxpayer and the brother? Would it make any difference if the sale of the residence to the third party took place after the alternative valuation date?

His basis would be 80% of the 140,000 plug 32,000 for starters; then of course add improvements and fixing up expenses in order to compute capital gain or
loss. Yes, loss, since inherited property is de facto investment property.

[JohnH]

Thanks Harlan. I should have said "gain or loss", shouldn't I? Taxpayer is pretty sure there will be a capital loss of some sort given the situation. But he doubts the property will even bring $140,000 without some cosmetic fix-up work, and he's OK with knowing how it's all going to turn out, even allowing for the fact that he probably overpaid the brother to begin with.

What do you think about the brother? Would he have to report a $4,000 capital gain ($32,000 minus 20% of $140,000), or a $2,000 capital gain ($32,000 minus 20% of $150,000), or a 0% capital gain ($32,000 minus 20% of $160,000) ? Seems like the related party transaction might throw a monkey wrench into using the $160,000 but I don't do much estate tax work so I may be chasing a rabbit here.

[ChEAr$]

Thanks Harlan. I should have said "gain or loss", shouldn't I? Taxpayer is pretty sure there will be a capital loss of some sort given the situation. But he doubts the property will even bring $140,000 without some cosmetic fix-up work, and he's OK with knowing how it's all going to turn out, even allowing for the fact that he probably overpaid the brother to begin with.

What do you think about the brother? Would he have to report a $4,000 capital gain ($32,000 minus 20% of $140,000), or a $2,000 capital gain ($32,000 minus 20% of $150,000), or a 0% capital gain ($32,000 minus 20% of $160,000) ? Seems like the related party transaction might throw a monkey wrench into using the $160,000 but I don't do much estate tax work so I may be chasing a rabbit here.

the brother? I think he'll view the whole thing as part of his inheritance and consider all
moneys received tax free. (grin

But yes, capital gain of $ 4,000, which in his tax bracket may be zero tax.

[dyne]

As I understand IRS IRC 1012 for the tax year 2010 ONLY a gain upon the sale of
INHERITED PROPERTY will be based upon the DONOR'S adjusted basis compared to the
sale price, NOT the fair market value as it has been for many years. This is a tremendous
change and will result in a HUGE gain and TAX in most cases. But this Code section
expires at the end of 2010 so thereafter we revert to the old rules of the being allowed
the stepped-basis or FMV to calculate the gain. Am I understanding this right? This is
ABSURD! I would appreciate comments!

[Lion]

2010

Estate tax is repealed for decedents dying in 2010. (Gift tax is not repealed.) The repeal sunsets in 2011 unless Congress acts. Otherwise, back to 2001 rules taxing estates over $1 million.

Old rules, basis steps up/down to FMV on the date of death. In 2010, an estate will increase basis by $1.3 million with an additional $3 million for assets to a spouse. I don't even want to think what the new estate tax return will look like to make a whole series of calculations. (Or, how the siblings will argue with the executor over which assets share the $1.3 million!) There's also a rule about decedent's personal residence, and for capital loss carryovers and NOLs.

I don't think I'm going to allow any of my clients to die this year.

TTB 21-21