1041 estate

[fliszt]

Client’s father died last October. Pre-nuptial allows wife (step-mother to 7 sons) to live in house til death. House transferred at date of death, from father to father’s trustee and to wife’s trust. There is also a vacant lot adjacent to home which belongs to split as previously described. House purchased for $130k 15 years ago and is now worth $290k. Lot purchased for $2500; Current value $4000. Do I do a stepped up value on the house and put on 1041 estate sched D or does it wait and go from the step-mother’s trust to the 7 sons when she passes away? And ditto for the lot? Total assets less than $600k
Thanks for your help.
Larry

[OldJack]

Step-up in tax basis occurs on the date of death of the owner regardless of who is the beneficiary or has a beneficial interest. A step-up in basis is not reported anywhere unless the property is sold, except on an estate tax return form 706 if required to file.

edit: transfer according to the will or trust is not normally considered a sale.

[fliszt]

Thanks Old Jack

I appreciate your reply. Wasn't sure how to handle.
Thanks again.
Larry

[Kong]

Question

On stepped up basis upon death of owner. How do you document current market value?
I ask client to have property appraised by a professional if they can afford it usally around ($400.00). If this is not possible then to go to assesors office and obtain value on property, or call a realty agent and do a market analysis on current sales within market area. What other means are available to clients?

[jainen]

the whole county

>>What other means are available to clients?<<

There are three main approaches to valuing real estate. The best known is to compare the actual sales price of similar property. Careful adjustments should be made for for differences in market appeal.

Another way, used by insurance, is the cost of replacement. This is less accurate because, for example, a swimming pool might cost $20,000 but actually reduce the sales potential and value. In any case, construction costs shed little light on land value which can often be 25% to 50% or more of the total.

Commercial and investment property is often valued according to its income potential. The figure depends on many assumptions about future economic trends and desired yield.

All three of these theories are extremely technical. Often the property issues are inadvertently or deliberately mixed with other factors. For example, a mortgage company will adjust the value as collateral according to the owner's credit history. Real estate agents try to bump up the price with marketing gimmics concerning "amenities" such as pride of ownership. Obviously more expertise will provide a more accurate figure.

Even a licensed appraisor will come up with different values depending on the purpose of the study. A divorce court wants a very personal evaluation, while the tax assessor wants conservative methods that can be applied consistently across the whole county.

[Kong]

Jainen-Very informative on

Three main approaches to valuing real estate. But what approach do you take with your clients? I want to avoid the Internal Revenue coming back and saying price is over inflated or that property was under valued. What best works for the rest of the group? I am not challenging the methods others use but I want to know what is acceptable to the Internal Revenue.

[George Boutwell]

But what approach do you take with your clients? I want to avoid the Internal Revenue coming back and saying price is over inflated or that property was under valued. What best works for the rest of the group? I am not challenging the methods others use but I want to know what is acceptable to the Internal Revenue.

In my county and state, the assessor website usually has details on several recent sales of similar (residential) properties. Selling price must be disclosed and becomes public record with every transaction. This is basically the same database IRS uses for most properties in estate-tax audits. It's free, it's quick and unless the property is "unique," it is close enough for government work. If there are factors that would raise or lower the condition of the property, then they can be documented with photographs, narratives or subsequent documentation -- for example, if the value is below market because the property needs a new roof, a receipt for a new roof a year later would show that.

Spending $400 for an appraisal that may never be needed seems like a waste of money to me. But whatever you do, make eight copies and distribute them to the trustee and beneficiaries, so that at least one will still be able to find it when the time comes.

[fliszt]

Jainen, George, Kong,

thanks for your inputs. This situation is a bit different than the straight forward estate. The father that passed away had 7 sons. Father remarried and had a pre-nup agreement drawn up. Moved from MN to AK 30 yrs ago. Current wife hid the pre-nup and will because she and the 7 sons did not get along. She would not give key to safety box at bank. Hired lawyer. Lawyer had the house and adjacent lot appraised. He is being difficult in giving the 7 sons a copy of the estimate. We'll see how it goes. Sons finally got key to safety deposit box. All the papers had been gone thru. Pre-nup gone. She wants entire house in her name instead of the "right to live their until death". I've gotten the s/s# changed on the death benefits to father's fed ID#. I think now I can complete the fiscal 1041. Don't know what's going to happen with the house. But at least now I know I don't have to worry about it.
Thanks again.
Larry

[S T]

Working with Estates and Probate

I have always been fortunate ( I guess) to work with attorneys that handle estates and probate, so I have usually been furnished, and the courts as well, with a formal appraisal from licensed appraiser, whether that be independent or one appointed by the probate court.

In the few that I have handled, I would be reluctant to establish the FMV at date of death due to comps furnished by a "local real estate agent". In real life the only time I do that is a "maybe" on the death of a spouse.

I would always have the trust or estate pay the $$ for a formal appraisal, so that it establishes values for the "Estate" and also pass through to the beneficiaries.

Sandy

[George Boutwell]

California Dreamin'

Of course, you practice in an estate where probate procedures are so archaic and expensive that if they technically didn't invent the living trust, they popularized it so much that it spread to places where it was unnecessary and inconvenient.

I wonder if appraisers have message boards where some of them ask the kind of basic questions that startle those of us who follow tax-practitioner message boards.

[Gretel]

I wonder if appraisers have message boards where some of them ask the kind of basic questions that startle those of us who follow tax-practitioner message boards.

Probably so.

I also try to get appraisal and am relieved if there is one. Just had a client move from CA to MT and no appraisal was done when house was sold. Comps were all we had. Sometimes things have to do and I hope no auditor in his right mind would suggest zero basis for lack of appraisal.

[cpadan]

I hope no auditor in his right mind would suggest zero basis for lack of appraisal.

I think that would be covered by the Cohan Rule.
Dan