1. Home
  2. Taxes General Forum
  3. Best way to dispose of residence in estate, tax-wise?

Best way to dispose of residence in estate, tax-wise?

Hypothetically, what is the best way tax-wise to dispose of a residence in an estate when the owner dies?

If it makes a difference, assume the residence is part of a living trust. Also assume there is no surviving spouse and no mortgage.

I believe there are two ways: (a) sell the property as part of the estate and distribute the proceeds to the beneficiaries; or (b) transfer title to the beneficiaries (or just one beneficiary if that meets the distribution terms of the trust/will), then sell the property.

Assume that the terms of the trust/will does not preclude either approach.

It seems that the tax benefit of #b is that the basis is stepped up. So that would minimize capital gains tax. Right?

Or does #a avoid capital gains tax altogether, at least at the federal level?

Note that Calif law applies here. I believe Calif no longer has estate tax. Right? In that case, is there __state__ capital gains tax in both cases?

Does Calif recognize the stepped-up basis? Or is that just a federal benefit?

Reply to
executor
Loading thread data ...

Related question that might fit in well here:

For Estate Tax, an appraisal of real property is obtained, valuing the property as of the date of death. But that does not include any costs necessary or ancillary to a disposition of the real estate. So, assuming an appraisal that completely reflects the market, and assuming a flat market for a period of several months, there will necessarily be a loss when disposing of the property, once you consider selling costs. Comments?

Reply to
Pico Rico

I can't think of a way it makes any difference at all to the estate. In any case the basis will (assuming it will) go up to the date of death value.

The only time I can think of it making a difference is if the beneficiary is going to live in the residence for at least two years. In that case the beneficiary can get an additional $250,000 of the increased value ($500,000 if married) tax exempt when he eventually sells it.

I believe that California law conforms to federal tax law in this regard.

In California probates real property is appraised by a probate referee, not necessarily a professional appraiser. The appraisal may not be considered authoritative, and the IRS may want another that is deemed more credible.

Assuming there's a loss in that situation, in general nobody gets to take the loss on their taxes, since it's considered a personal loss rather than a business loss. ___ Stu

formatting link

Reply to
Stuart Bronstein

So, what is wrong with this picture? You pay estate tax on the full value, which can never be realized due to costs associated with disposition. Something is amiss if the disposition takes place soon after death.

Reply to
Pico Rico

I concur. Little to no difference.

If the property was the decedent's PR, doesn't the estate get the $250k exclusion (not that it really needs it, as any sale within 3 years could be argued to be the true FMV despite what was put on the 706 as an appraised estimate)?

It does. I am in California.

There is no probate where there's a living (grantor) trust (which becomes irrevocable upon death).

I disagree. For example, if liquidation of the property were necessary in order to pay any estate tax, the cost of sale could be deducted as an administrative expense of the estate. [IRC 212(3)] As for loss on sale before considering any cost of the sale itself, such shouldn't happen over "several months" because the actual FMV would arguably replace the appraisal estimated value, especially if within the 6 month alternative valuation window.

Reply to
D. Stussy

Since the estate doesn't reside there, it may not. Perhaps it can be taken on the decedent's final tax return. But if the estate sells it, it should be on the estate's return.

In any case, as you note, it really shouldn't make any difference one way or the other, since, if the estate sells it, it should be for about market value on the date of death, resulting in little or no tax in any case.

Right. OP was asking for the difference between different ways of passing property, and that's the information I was giving him.

Thanks for the clarification. ___ Stu

formatting link

Reply to
Stuart Bronstein

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.