Heirs Need to Establish Values | Print |  E-mail
Thursday, 07 March 2013 14:29

By Phil Hunt

Special to the Times

Q: I need an answer to a question about my children inheriting my property and keeping my Prop. 13 taxes. I have owned my home since 1959. I set up a trust and the property is in the trust. It is my understanding that when my children inherit my property it will be valued at the prevailing market value, which would be the tax base when they eventually sold. This should save them a considerable amount of capital gains tax. If they use the Prop. 13 tax base for the property taxes, how would this effect capital gains taxes when they sold? What if I had a remodel done? How would that effect my property value and my Prop. 13 tax base?

A: I am not a tax professional nor am I an attorney, but here is what I have learned from experience. This is a good question and one that needs to be explained.

When you pass on to the other side, your children will inherit your property, either by will or through a trust. I am presuming that it will be through a trust since you had the foresight to set one up.

The step-up in basis in the value is not automatic. The heirs must hire an appraiser to establish the value as of the date of death. The sooner this is done the better. The further back in time an appraiser has to dig, the less information available and the harder it is to establish the fair market value as of the date of death.

This appraiser’s value has nothing to do with the assessor’s value for Prop. 13 basis. Prop. 13 is a function within the county assessor’s office. Their function  is for one purpose — to set the value for property taxes.

The value you will get from the appraiser is what is known as “fair market value” as of a certain date, the date of death, and is for your files only, to be used at such time as the heirs sell the property. The value will be used to establish capital gain or loss with the IRS and the State.

Keep in mind that the Prop. 13 tax base being passed to your children is also not automatic. The heirs will have to file a claim with the county assessor’s office to retain those Prop. 13 benefits.

Note: “Value of real estate” is a nebulous term that needs some explanation whenever spoken. There are two values addressed here: assessed value and appraised value; seldom ever are they the same.

Then you have: buyers’ value, sellers’ value, lender’s appraised value (fair market value), court value (as used in a probate sale), auction value, bankruptcy value, foreclosure value, cash value, owner-carry-financing value, replacement value, construction value, income value… How complicated can it get?

There are other values, but suffice to say, one must be quite clear as to what value you mean when discussing real estate.

Nothing here should be construed as legal or tax advice. Contact an attorney or a tax professional for actual advice. It is also advisable to contact the county assessor’s office for a more-definitive answer. Thanks for the question.

Phil Hunt is a real estate broker in Castro Valley. Fax questions to 583-5480.



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