In a recent post I wrote about some of the issues that a buyer may want to look out for when considering purchasing a home that is involved in the dissolution of an estate. Today, I’ll post a little more detail from the seller side so that if you find yourself in the unenviable position of being the executor of an estate you’ll at least be able to start working your way through the pile of requirements that will apply to you.
This is not legal advice but just a practical outline of items I typically see when working with estate sale clients. If you have specific questions, contact an estate planning attorney of your choice. I know some good ones if anyone needs a recommendation including my own EP attorney, Tim Burkart, at Garvey Schubert Barer in Seattle.
When an executor is called out in an estate this person is required to follow the terms of the will and any other legal requirements that impact the estate of the deceased, including handling tax issues and the disposition of property both real and personal including the sale of real property, meaning real estate.
Typically when a person dies it’s the executor’s job to help determine what the value of the real property is worth. Obviously it doesn’t require the executor to do this on their own. It can be done via an appraisal or through the sale of the property to determine “market value”. Either one is appropriate for the IRS as long as it is completed by a disinterested 3rd party.
For heirs getting an accurate view of the property’s worth is critical because this is when there is something called a “stepped up basis” that occurs which will be necessary for determining whether or not tax is paid upon the disposition of the property. What does “stepped up basis” really mean?
It’s simple – let’s say this is your grandma’s house and way back when she and grandpa bought it in 1940 they paid $10,000 for it. Now, 68 years later the house is valued at a market price of $500,000. The “stepped up basis” is how the house’s value has stepped up over time to be worth $500,000 today. Any tax to be paid, if any, on the sale of the home will be based on this value moving forward. If the will states that the property is to be sold with proceeds split or given to heir(s), and the home is sold within 6 months of the decedent’s passing, then there will typically be no tax paid on the proceeds of the sale. However, if the property takes longer than 6 months, it becomes more of an issue depending on if the house is appreciating in value over that period of time.
An item to consider is this, a client of mine had a parent die and they asked the appraiser they hired to mark the appraisal as low as he could reasonably put it. I asked him why this was the case and it brought up details that basically my client didn’t understand the difference between selling his own home and an estate. Current IRS rules allow up to a $250,000 capital gains exemption per person when selling personal property that has been a private residence. But, in the case of an estate you want to have the value reflected at the best/highest value possible, particularly if you think you won’t be selling the real property any time soon. In his case the appraiser gladly lowballed the value and it came in around $365,000. I just sold the house for a little over $440,000. If we’d been past the 6 month mark for selling and he’d had to use the appraiser’s report for the value he’d be paying tax on the $75,000 difference in gain. If that appraiser had valued the home at it’s “real” value then in the scenario of a sale 6 months later there would have been little to no tax paid because the value wouldn’t have risen much, if at all.
A word of caution – in Washington State we do have an estate tax that kicks in when an estate is valued at $2 Million or more (per person). You’ll want to confer with an estate planning and/or tax attorney to discuss what this could mean for you and your heirs if you rank in the small percentage of folks that fall into this catagory. And, for those who’ve been sleeping under a rock the past 10 years, in certain locales of WA State if you have been in your home a really long time, you might need to get a reality check to make sure your property value didn’t just push you into that category whether you know it or not.
Tim Burkart will soon be sharing his expertise on this site so I won’t go too far into his territory with writings on estate planning but I will write articles that show how estate planning and real estate either collide or work well together in a practical sense.
Have a great weekend!
