Inheriting property with a lien

[rtsietsema]

Five grandchildren are the inheritors of the grandmother"s house in Illinois. The deceased had taken advantage of the State's deferral program to avoid the cost of property taxes on a fixed lower income. Unfortunately the State charges 6% simple interest and she lived to 106, and there is a balance due in taxes and interest in excess of $50,000. The property is certainly worth less than $100,000, and we are working to ascertain the appraised value at time of death as the property is prepared for sale.

The question here is, does the tax lien against the property become a factor in determining a loss to the inheritors? Using the numbers above, ignoring change in value and cost of the realtor etc, do each of the five grandchildren have a $10,000 capital loss?

[spanel]

Five grandchildren are the inheritors of the grandmother"s house in Illinois. The deceased had taken advantage of the State's deferral program to avoid the cost of property taxes on a fixed lower income. Unfortunately the State charges 6% simple interest and she lived to 106, and there is a balance due in taxes and interest in excess of $50,000. The property is certainly worth less than $100,000, and we are working to ascertain the appraised value at time of death as the property is prepared for sale.

The question here is, does the tax lien against the property become a factor in determining a loss to the inheritors? Using the numbers above, ignoring change in value and cost of the realtor etc, do each of the five grandchildren have a $10,000 capital loss?

I believe you do not have a loss. You have property with a debt against it.

Would you ask the same question if grandmother took out a home equity loan for $50,000 throughout the years and paid for said taxes?

Chris

[rtsietsema]

Thanks...

I hadn't look at it from that angle. It makes sense.

Thanks

[Roland Slugg]

Unfortunately ... she lived to 106.

Unfortunate ... for whom?

The beneficiaries' starting basis in the inherited house is its FMV as of the decedent's DOD. The back taxes and accumulated interest thereon will eventually be paid by them, either outright or as a subtraction from the sale proceeds when the property is sold. In either case the total of the accumulated taxes and interest, up to the DOD, gets added to the benes' basis, Assuming the property is sold for the same price as its DOD value, there will be a LTCL on the sale equal to the amount of that big arrearage.

The back taxes (and interest thereon) up to the DOD can not be deducted by the benes, but they will end up getting a deduction just the same.

The real estate taxes and interest allocable to the post-DOD period is deductible by the benes, or they can elect under Code §266 to capitalize those costs.

[rtsietsema]

Increased basis makes sense

If indeed the taxes and interest are added to the basis for the inheritors, then the LTCL makes sense. This in addition to the costs of selling the property and preparing for the sale etc.

Thank you Roland...

Any other thoughts are appreciated.