Discussion:Basis Value for real estate

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Discussion Forum Index --> Basic Tax Questions --> Basis Value for real estate


Discussion Forum Index --> Tax Questions --> Basis Value for real estate

Rbofsb (talk|edits) said:

26 July 2010
After researching, I am still a bit confused. I have a client who was added to the deed of his fathers house (by the father) 3 years ago (after the father learned of a terminal illness). The father has subsequently died, and now my client is the owner of the real estate (a house) and wants to sell the house. Is his basis value in the property based on the date of "deed" change, or the DOD of the father ?

R2 (talk|edits) said:

26 July 2010
Need more info.

How was title held (JT, TIC, etc)?

What was the year of death?

Rbofsb (talk|edits) said:

26 July 2010
R2: Good question. I will find out and post the answer !

Rbofsb (talk|edits) said:

27 July 2010
R2: My clients father drafted a beneficiary deed that "gifted without consideration" the property with JT with the rights of survivorship. This happened in October of 2006. DOD was July 2010.

Hope this helps.

Kevinh5 (talk|edits) said:

27 July 2010
2010 death means the executor applies the rules of §1022

since this was JT with a non-spouse, the % of contribution rules apply - in this example, the entire amount/house would be includable in the estate of the decedent (presumably, unless son had made some of the mortgage payments prior to father's death, in which case you would use the % of contribution rule)

R2 (talk|edits) said:

28 July 2010
If Internal Revenue Code § 1014(b)(9) applied here, the basis would necessarily be determined under the consideration furnished test contained in Internal Revenue Code § 2040(a).

However, Internal Revenue Code § 1014(b)(9) does not apply to decedents dying after December 31, 2009. Thus, we will need to follow the 1022 modified carryover basis rules which contain a modified consideration furnished adjustment.

On joint tenancy property, the executor can make an election to step up the entire property to fair market value, but the step-up for all non-spousal property may not exceed $1.3 million. If the fmv at the time of death is less than the Dad’s adjusted basis, then the son’s basis will be fmv on the date of death.

If the executor does not make the step-up election, then the son’s basis is the lower of Dad’s basis or the FMV on the date of death.

See Internal Revenue Code § 1022(b)(1)(B)(i).

MWPXYZ (talk|edits) said:

28 July 2010
Is it possible, or even likely, that Kevinh5's answer may be correct by the end of 2010?

Or maybe both will be correct? This is like 1986: for dead people.

Kevinh5 (talk|edits) said:

28 July 2010
Once they're dead, I think all years are the same, to dead people.

MWPXYZ (talk|edits) said:

28 July 2010
But their "useful life" for tax purposes makes a few post mortem years unique.

I guess I should have said regarding dead people.

Rbofsb (talk|edits) said:

28 July 2010
Thank you VERY much for your help !!!!

CATaxAtty (talk|edits) said:

29 July 2010
Ah, an oldy but with a new twist. Here goes -


1. No Joint Tenancy - father and son don't have a JT because they did not acquire title at the same time. See - http://en.wikipedia.org/wiki/Concurrent_estate#Four_unities_of_a_joint_tenancy (failed JT reverts to a tenancy in common (TIC)).


2. No Full Basis Step-up - ordinarily, entire property would get a basis step up. This is because section 2036 would pull the entire property into dad's estate for estate tax purposes (implied life estate), which would, in turn, trigger a 1014 step-up for the entire property. But that was yesterday..


3. Partial Step-up - today, dad owns only a TIC share and 1014 does not apply. New IRC 1022 controls and gives a step up only to what dad 'actually owned' (i.e. the TIC share). So only his portion of the house gets a step up, not (as would normally be the case), the entire property.


Dénouement - ironically, estate tax repeal actually hurts this family. Doubters can see IRC 1022(d)(1)(A) - no basis step up unless "the property was owned by the decedent at the time of death."


Where is Dennis on this?

Kevinh5 (talk|edits) said:

29 July 2010
I don't know, it would seem that if a deed can be registered at the county records office as JTWROS, that state law would say that a joint tenancy exists.

I also don't know that wikipedia only presents United States information. Maybe that's English law in the article you linked?

Kevinh5 (talk|edits) said:

29 July 2010
Also, I would argue that the first 'unity' (never heard of that before your article) IS met: Father deeded his fee interest to HIMSELF AND SON, thus the two acquired their joint interest at the same time (from him) via that deed.

But hey, you're the attorney. I went to a public university and took accounting and business classes. What do I know about the law? (read that as an invitation to refute my last argument, please)

CATaxAtty (talk|edits) said:

29 July 2010
Wow, great question. Kevin you reminded me of something I completely forgot from law school. You can actually create a JT this way in some states.


The reason is so that people won't have to do 'strawman' transactions to get a JT (i.e. dad to strawman, strawman back to dad & son as JT). Many states now allow what dad did above. However, some still require the strawman. California is a 'modern' state (no strawman required). The original poster is in Kansas. Dunno the rule in Kansas.


Anyhoot.. JT or not, you still have to contend with the new basis rules. It looks like some elder law attorneys have been bickering about this topic themselves (and the right way to go is anybody's guess). See - http://www.njelderlawestateplanning.com/tags/1022/


Here you could argue any one of the following possibilities:


1. 50% Step Up - dad owned a TIC interest of 50% and gets a 50% step-up.


2.  ??% Step-Up - this is not a husband and wife, so the example in 1022(d)(1)(B)(i)(I) doesn't apply. Instead we look to 1022(d)(1)(B)(i)(II) (the next one down) and dad gets a step up to the extent that he furnished consideration for the acquisition of the property.


3. 100% Step-Up - dad had an implied life estate in the entire property, just as under the old rules, and this gets a full step up under 1022(e)(3) ("any other property passing from the decedent.. without consideration").


Right now, I don't know what the right answer is. But talk about a killer tax exam question.

CATaxAtty (talk|edits) said:

29 July 2010
PS - where's Dennis?

Kevinh5 (talk|edits) said:

29 July 2010
I've found that the best way to get Dennis' attention is to have '1041' 'estate' or 'trust' in the discussion title.

That or for me to give a wrong answer. He's very good at catching my errors.

CATaxAtty (talk|edits) said:

29 July 2010
I just edited my answer above based on new findings (and yea, mine too).

R2 (talk|edits) said:

30 July 2010
Not really sure that there is a TIC interest here. I agree that the unity of time element component is missing here. However, I believe that some states, including California, will allow a property owner to create a joint tenancy deed between himself and another individual. See California Civil Code Section 683.

Dennis (talk|edits) said:

31 July 2010
I dunno, guys. Sounds like Dad continued to live in the house after transfer. My question would be whether the implied life estate could have been considered abandoned by a move to a nursing home or such.

R2 (talk|edits) said:

1 August 2010
Not sure that the 2036 retained life estate rules apply for decedents dying in 2010.

CATaxAtty (talk|edits) said:

2 August 2010
This is difficult stuff so let's clarify some things. 2036 'does' still applies. Only the estate tax was repealed this year. In other words, all of the old rules apply for determining what 'goes into' the estate. The only rules that don't apply are the ones that 'tax' the estate.


So with the basis issue - I believe some elder law attorneys are making the following argument:


1. Section 2036 provides that property subject to a retained life interest is 'deemed' to be included in the decedent's estate.

2. Section 1022 determines what property is eligible for a basis step up under the new carryover basis rules.

3. Section 1022(e)(3) provides that among the eligible property is 'other property' which passes from the decedent for no consideration.

4. Therefore, property that is 'deemed' to be a part of the estate under 2036, should qualify as 'other property' passing from the decedent under IRC 1022(e)(3).


So the issue is whether the deemed inclusion under 2036 also creates a deemed inclusion under 1022. This is a complex legal issue and I doubt anyone has a sure answer. In my opinion, I have no clue whether this would hold any water. If it was disclosed properly though, I don't think it would be a frivolous position.


Just my .02 cents.

R2 (talk|edits) said:

2 August 2010
Since Sec. 1014(b)(9) does not apply in 2010, Sec. 2036 has no real effect on the basis of property acquired from a decedent who dies in 2010. See Sec. 1014(f).

CATaxAtty (talk|edits) said:

2 August 2010
Correct. But the issue is what effect it might have on 1022 (the new basis rules).

This is complex stuff, I realize. I'm including links to some commentary. The issue is so complicated in fact, it provoked a letter to the IRS from the National Academy of Elder Law Attorneys (NAELA). They are demanding clarification on this issue (link below) -

http://www.naela.org/MemberPages/documents/IRC_1022_letter_3_31_10.pdf

http://elderlawblog.info/2010/05/06/why-doesnt-a-reserved-life-estate-get-a-step-up-in-basis-under-section-1022/

http://www.njelderlawestateplanning.com/tags/1022/

R2 (talk|edits) said:

3 August 2010
Thanks for those links. Gave me something to think about.

I wish Sec. 2036 did apply to Sec. 1022. This would simplify matters.

Based on what I just read, the central issues are whether the decedent owned the property at the time of death and whether the property passed from the decedent by reason of death. I can see arguments on both sides.

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