RE: STEP-UP BASIS & REASSESSMENT

RE:   STEPPED-UP BASIS & REASSESSMENT

I have recently been asked to explain the difference between a “stepped-up basis” in value and “reassessment” relating to the gift or inheritance of real property.

Stepped-Up Basis

A “stepped-up basis” is a “capital gain” tax issue. Any property that you acquire has a basis or value regardless of whether you get title by purchase, gift or inheritance.

When you purchase a property, the basis or value is generally the purchase price. When you acquire a property by gift or inheritance, the basis or values are determined differently.

When you resell a property, you make a profit, post a loss or break even. If you make a profit, then you sold the property for more than its original basis and that profit is generally subject to a “capital gain” tax.

This article only concerns properties acquired by gift or inheritance.

1Inherited Property.

Property that is inherited generally gets a “stepped-up basis” in value. A stepped-up basis means that if you inherit property, the new tax basis of the property is its value on the date of death.

For example, assume that a daughter inherits a residence worth $410,000.00 at her mom’s death. Her mom originally paid only $10,000.00 for the property in 1960. The daughter gets a “stepped-up basis”, which means that the new tax basis would be the value of the property on the date of mom’s death.

When the daughter resells the property, she will only owe a tax on the gain in excess of $410,000.00. She will not owe any tax on the difference between the original purchase price paid by mom and the value at date of death.

If you inherit property and later resell it, you will pay “capital gain” tax based only on increases in value in excess of the value at date of death.

 2.  Gifted Property.

If a property is gifted during the owner’s lifetime, then the beneficiary does not get a “stepped-up basis” in value. This means that the beneficiary will owe a “capital gain” tax on sale based on the amount originally paid by the grantor.

For example, assume a mom deeds the same residence to her daughter one week before her death. The daughter does not get the “stepped-up basis” because the property was not inherited.

When the daughter sells the property, she will owe a capital gain tax on $400,000.00 in gain ($410,000.00 (value at mom’s death) minus $10,000.00 (mom’s original purchase price) = $400,000.00) in addition to any gain in excess of $410,000.00.

In other words, if you are gifted property during the grantor’s life and later resell it, you will pay “capital gain” tax on all amounts in excess of the original purchase price.

Any contemplating gifting property during their lives should consult their CPA prior to executing the deed.

It is generally better to inherit than to receive gift property.

Reassessment

A “reassessment” is a property tax issue. The Assessor in the County where a property is located generally has a right to reassess any property to market value upon transfer. The amount of property tax due is based upon this reassessed value.

Certain transactions are exempt from reassessment. Transfers between parents and children are exempt from reassessment. Transfers between grandparents and grandchildren are only exempt if the parents are deceased on the date of the transfer. CA Rev & Tax Code §63.1.

These exemptions apply only to a primary residence and the first $1 million of real property other than the primary residence. In other words, the exclusion from reassessment is limited.

 To qualify for the exemption, a claim form must be filed with the Assessor within three (3) years of the transfer or prior to the transfer of the property to a 3rd party, whichever is earlier. If a claim is not filed timely, then the exemption will not be granted (if at all) until the beginning of the next year.

The best procedure is to file the claim form at the same time as you record the Deed.

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