How does step up basis affect capital gains on the sale of an inherited house?


Ed: Thank you, Attorney Tom. I do have a question. My brother and I in November inherited a house in the state of Maryland and I just wanted to know how we figure out the cost basis for that.

Attorney Tom Olsen: The IRS Federal Rules say you get what’s called a stepped up basis, Ed. Step up basis says this: when you inherited that home from your mom or dad, your basis for capital gains tax purposes is a value at the date of his or her death. So at the moment, let’s say, if mom passed away, the home was worth 200,000 and you and your brother sell it for 200,000 you’ll pay absolutely no capital gains taxes. If you hold onto it for a couple of years and sell it for 225,000 you’ll pay capital gains on your $25,000 profit. Ed, does that make sense to you?

Ed: Absolutely. How do you figure the value you need to get --

Attorney Tom Olsen: If you’re going to sell it within a few months of mom passing away, what you sell it for is what it was worth when she died.

Ed: Okay. We have it on the market right now with an agent in the state of Maryland.

Attorney Tom Olsen: Then that will be good enough for the IRS. If you were going to hold onto it for a few years and then sell it, well, you’d have to prove the IRS what it was worth when your mom died and on that basis then you would get an appraisal. But if your intention is to sell it right away, you do not need an appraisal, Ed.

Ed: A follow up question. If it sells for less than that valued, is that a capital loss?

Attorney Tom Olsen: Maybe, Ed. It’s not like tax deduction, but I think what you can do is you can apply that loss against any other capital gains that you’ve had in this 2015.

Ed: That sounds right. And a third if I have time, Attorney Tom, will the title search when we go to closed indicate if there’s any outstanding things owed on that house.

Attorney Tom Olsen: Absolutely. Any mortgages, any judgment leads, etc. would be picked up to a title search.

Ed: So we need a title search for that. All right. We appreciate your show. Man, you rule, you’re on the spot and good answers. Thank you very, very much.

Attorney Tom Olsen: Thank you, Ed. I appreciate it.