Why you should get a Step Up in Basis
When a spouse passes away, the last thing the surviving spouse is thinking about is tax consequences. We know this is not the easiest subject to talk about. However, eventually the surviving spouse will need to get a Date of Death Valuation Report. Having this report will save the survivor thousands and thousands of dollars in taxes when they eventually sell their home.
If you’re looking to get a market analysis report for insurance, estate planning purposes or just for your own curiosity visit: http://bit.ly/38qh6z1 We’re happy to put that together for you with no obligation.
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When a spouse passes away, obviously the last thing the surviving spouse is thinking about is tax consequences.
However, for couples who have owned their home for a number of years, and who have experienced a lot of appreciation on their home, missing this crucial step could potentially cost surviving spouses thousands of dollars. Hi, I’m Steve Hill,
And I’m Sandra Brenner with the Brenner Hill team at Windermere and we help baby boomers and above downsize out of their current home and right size into their new home. Washington is one of only 10 community property states in the US. Most married couples own at least some of their real estate and other investments jointly with right of survivorship. This means that when one spouse dies, the ownership of the entire investment passes to the surviving spouse. For the purposes of this video, we will be talking about the primary residence that the couple owned and lived in together.
This automatic right of survivorship makes a lot of sense for married couples with modest estates, who want everything they owned to pass on to the surviving spouse. In Washington, assets pass to the survivor with no state or federal death taxes, and no need for probate or other estate complications. However, the ease of this setup can cause the surviving spouse to overlook a significant income tax consequence that takes place. The survivors tax basis in the home has most likely changed.
If the home has increased in value from the time that the couple purchased it, and the death of the first spouse, the survivor should receive what’s called a step-up in basis. This step-up in basis will reduce the capital gains tax that’s due when the home is eventually sold by the surviving spouse. But this change in tax basis could potentially be overlooked. The surviving spouse often doesn’t know that he or she can receive this tax benefit. The step-up in basis rule applies to real estate and other assets you own that are subject to capital gains taxes when sold. But again for the purposes of this video, we’re only focused on the primary residence. For other investments, we highly suggest you consult your tax professional.
The rule says that when you receive a capital gain asset from a decadent, your tax basis is not for what the deceased paid for it, instead, it now becomes the fair market value of the property at the date of decedent’s death. This section of the tax law means that the appreciation in value of the asset that occurred during the lifetime of the decedent on the portion he or she owned, will never be subject to capital gains taxes. When you later sell the property capital gains taxes will be due only on that portion of the sales price that is in excess of the stepped-up basis you received. This can save you thousands of capital gains tax liability.
Here’s an example of how this works. Let’s say that several years ago, Fred and Mary bought a home for $150,000. They titled it in both of their names with right of survivorship. That $150,000 purchase price is their initial tax basis in the property. Fred passes away, and a few months later, Mary has a real estate broker put together a market analysis for the home to establish the market value at the time of Fred’s passing. The IRS refers to this report as the date of death valuation. Let’s say the home is now worth $800,000. As the surviving spouse Mary’s new tax basis is now $800,000, not the original $150,000.
Continuing with this story, Mary then sells the house three years later for $950,000. Since Mary has a date of death report with a value of $800,000, Mary will not have any capital gains taxes due on the sale of the home that was originally purchased for $150,000. Having this report just saved Mary approximately $80,000 in capital gains taxes.
There are three great reasons why you should periodically get a market analysis of your home. Upon the death of a spouse, you should absolutely get a market analysis or hire an appraiser to get an appraisal so that you have that date of death valuation. But the other two reasons to know the value of your home is for estate planning purposes like putting together your will or trust or to make sure that you are adequately covered with your home insurance. If you haven’t updated your home insurance policy in a while, you may be under insured.
We are always happy to provide you with a no obligation valuation of your property. Just reach out to us. We are here to help in any way we can.
Again, this was just an overview of this subject. It’s always best to consult your tax professional or estate planning attorney for legal advice and tax questions.
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