Q: I’ve searched your site but haven’t seen an answer to this question related to inherited property. What is an heir’s cost basis when selling commercial property from an estate that was contested for many years? Is the cost basis calculated on the “date of death” or on the date that we received the property?
Let me explain. The “date of death” value for my stepfather’s office building in 2002 was $500,000, which is a lot of money. But the estate was hotly contested for another 7 years. By the time the estate was finally distributed in 2007, the property’s valued had jumped to $1,100,000. Now, we’ve got an offer to sell the property for about $1,500,000.
Can one of the heirs claim the value at the amount set in 2007 for calculating any capital gain on the sale while everyone else uses the value set in 2002, when my late stepfather passed away? Or, do we all have to use the same valuation for the property?
A: The difference in value between 2002 and 2007 for your late stepfather’s property is significant. The property added $600,000 in value in just five years, and a full million dollars since he passed away.
What you want to know is if you’ll have to pay taxes on the difference between today’s selling price and the 2002 valuation or the 2007 valuation.
Given that the person died in 2002, the IRS would probably maintain that the value for the property for purposes of determining future taxes would be based on the date of death of the person that owned the property.
The IRS will give you some leeway in determining the value at or around the time of death and may even allow you to value that property based on an appraisal obtained within a reasonable time after the death, perhaps even 6 months or a year after the death. However, it seems unlikely that the IRS will let you determine the value of the property seven years after the owner’s death.
On the one hand, given the current state of the real estate market, if this property tripled in value over the last seven years, you’ve done quite well, but will owe a bit in capital gains taxes. Over the last seven years, you or someone else may have put money into the property for capital improvements that could reduce the amount of the tax gain. Your accountant will have to help you sort out the issues relating to your gain and the amount of tax you will owe on the sale of the property.
You may want to talk to a specialist in 1031 exchanges. If you were planning on selling the property but had wanted to buy a different property, you may be able to sell this property and roll the proceeds from the sale of this property into a different investment property. If you are able to use a 1031 exchange, you may be able to continue to defer the payment of all taxes which would have arisen from the sale of the property now.
Whether you qualify for a 1031 tax deferred exchange or not will depend on quite a number of issues, so make sure you talk to a person with considerable knowledge in this area. Write back and let me know what happens.
Read more tax articles on the Equifax Personal Finance Blog tax section.
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