Legal Question in Tax Law in New Jersey
Real estate valuation changes and personal and estate taxes
Upon the death of my grandfather, my two siblings and I were
willed his personal residence. As the house was not assesseed
before it was sold (except for tax purposes many years ago), on
paper our capital gains were quite large and we three must incur
much income tax because of this. In actuality, the appreciation of
the house was very little from the time that we acquired it to the
time that we sold it. At this point, is there any way to re valuate the
house so that we needn't pay these income taxes?
The catch is that if the actual (rather than the tax-assessed) value
of the house were reported in the estate, it would push the total
value of the estate above the level at which estates are federally
taxed ($650K for death in 1999). But this would at least distribute
a lower tax among more benficiearies rather than just we three.
My former accountant (who sadly passed away recently) said that
the gains made from the sale of this house truly needn't be
reported at all in my income tax return. Is this true?
3 Answers from Attorneys
Re: Real estate valuation changes and personal and estate taxes
I'll need more facts to give you a complete answer. However, I would think you could get an appraiser to give you a value of the home as of date of death. That will be your starting point to calculate your tax basis to figure your gain on the sale.
As for the estate tax issue, you may want to see if available deductions (e.g. debts, fees, commissions, etc) would bring the estate under the $650,000 threshold.
Re: Real estate valuation changes and personal and estate taxes
The Executor of the estate should have had the house professionally appraissed as of the date of death and that value included in the estate. An executor does not get to choose to do or not to do something like this. I strongly urge you to advise the executor to retain an attorney who will help him or her correct this error and avoid the imposition of an inappropriate income tax on the beneficiaries who received the home. This is a fundamental part of estate administration. If this was not done, there may have been other serious omissions that could possibly come back to haunt the executor and /or the beneficiaries. If you or the executor wish to discuss this furher, please call me at (973) 731-5110
Re: Real estate valuation changes and personal and estate taxes
Traditionally, when property is inherited, it takes a new cost basis, being the value as of the date of death, or 6 months afterwards. In NJ all real estate is required to be assessed at 100% of market value. However, assessments are subject to County Equalization Tables, so all properties are equalized throughout a County. Thus, assessments may be in amounts not actually 100% of market value, but when the equalization percentage is applied, will equal 100% of market value. Thus, the use of the assessed value in an estate or inheritance tax return might not be accurate. However, for income tax purposes, the date of death value is the correct value to use, to determine gain/loss. Also, if the house is the primary residence of a seller, owned for more than 2 years, either $250M or $500M of profit is not taxable, depending upon whether or not the seller is single or married filing a joint return. Contact me if you need help in preparing your tax return for the year of sale.
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