Step Up Basis

[mrbill]

Client purchased a single family home in 1967 for $18,000. Sold same in January, 2021 for $875,000. Client's spouse passed away 3 years ago. I plan on calculating the tax on a "Stepped Up Basis". Can I prepare a 4797 / D for 2021 "Now" and file this along with a check for the amount due ? There is talk that President Biden wants to eliminate the Step Up provision. Thanks, Happy New Year...

[TaxGuyBill]

You can prepare it and pay for it, but the actual tax will be based on 2021 tax laws, which may be different than they are now.

However, IF the step-up in Basis were to be removed, it would not be retroactive. The Step Up occurred 3 years ago, so even if they change the laws now, that would not affect the Step Up from 3 years ago.

[Rapid Robert]

Can I prepare a 4797 / D for 2021 "Now" and file this along with a check for the amount due ?

No, you can't file(*) a TY2021 Form 4797 or Schedule D now, and neither form can be filed stand-alone anyway. Wait, why are you mentioning 4797? Doesn't fit your facts. (*) well you can file it, but the IRS won't accept it for any purpose)

You can always make an estimate payment for the current tax year.

Was this a jointly owned principal residence of the taxpayer? How much of the basis are you planning to step up?

[Uncle Sam]

If this property was owned jointly with spouse, you need to obtain a FMV DOD of spouse 3 years ago. That's what determines your beginning basis for tax purposes.

[BOB W]

Don't forget about home improvements over those earlier years. From 1967 'til 3 years ago, a house will not survive without some capital improvements. Roofs, kitchen, bathroom, fences, and many other improvements.

[Uncle Sam]

If a FMV DOD value is used - home improvements before DOD become irrelevant.

[Lion]

... for the stepped up basis, which might be only half the basis.

[BOB W]

Lion, thanks. Remaining spouse will benefit for half of before and full after death of spouse of any capital improvements plus all fixup expense to sell.
It is a shame surviving spouse will only be entitled to $250,000 exclusion. Lesson learned, Sell, if sale is planned, ASAP.....$500,000 exclusion.
There was a 2year window, from date of death, for the surviving spouse to use the $500,000 exclusion.....

[TaxGuru]

I haven't seen any mention of which state the residence is in. If it is in a community property state, the entire home's cost basis is stepped up to its FMV as of the date the first spouse died. See Page 6-20 of The TaxBook.

[BOB W]

Nice Point

[Rapid Robert]

I haven't seen any mention of which state the residence is in. If it is in a community property state, the entire home's cost basis is stepped up to its FMV as of the date the first spouse died. See Page 6-20 of The TaxBook.

But people have asked what portion of the basis is intended to be reported as "stepped up". The community property treatment you mention is not universal, it still depends on the form of property ownership. We don't yet know whether the spouse even owned any portion of the property, since mrbill has not responded to any of the questions posed.

Don't forget about home improvements over those earlier years. From 1967 'til 3 years ago, a house will not survive without some capital improvements. Roofs, kitchen, bathroom, fences, and many other improvements.

A home can easily "survive" without capital improvements, but usually over that time period repairs will be needed, which do not add to basis. For example, replacing a fence that is falling down will normally be a repair, not a capital improvement. Suggest the preparer review the Tangible Property Regs before assuming that all money spent on the house over the years add to basis.

[TAXNJ]

I haven't seen any mention of which state the residence is in. If it is in a community property state, the entire home's cost basis is stepped up to its FMV as of the date the first spouse died. See Page 6-20 of The TaxBook.

Great point and reference. Something that Original Poster can reference and decide if applicable.

[TAXNJ]

Lion, thanks. Remaining spouse will benefit for half of before and full after death of spouse of any capital improvements plus all fixup expense to sell.
It is a shame surviving spouse will only be entitled to $250,000 exclusion. Lesson learned, Sell, if sale is planned, ASAP.....$500,000 exclusion.
There was a 2year window, from date of death, for the surviving spouse to use the $500,000 exclusion.....

Good point by you and LION. Something that Original Poster can reference and decide if applicable.

[Rapid Robert]

Something that Original Poster can reference and decide if applicable.

Excellent comment by TaxNJ.

[BOB W]

Yes Rapid Robert, a house can survive without improvements but look at the gross sale price and the purchase price. Something had to be done....???