Step-up Tax Basis

As a Realtor® I am often asked about tax questions as they relate to the sale of real estate.

Though I am not a CPA or tax advisor, I can guide my clients to information that they can explore further with a tax advisor.

I’ll share a recent experience I had:
A friend who is helping his mother sell the family home recently asked me if there’s anything he and his mom should be aware as far as capital gains were concerned.

Two things immediately came to mind:
The Taxpayer Relief Act of 1997 and IRS Code 1014(a).

A. The Taxpayer Relief Act of 1997 allows the taxpayer to exclude gains of $250,000 (single filers) when they sell their house. Taxpayers filing jointly get to exclude $500,000.

  • This woman and her husband (now deceased) purchased a home in Willow Glen in 1980 for $80,000.
  • If she sells her home for $1M, the capital gain would be $920k (simply put only for this illustration, in actuality the gain would be less since there would be other costs that would reduce the gain, read capital gains tax .
  • At 15%, the tax would be $138,000.
  • With the $250k exclusion, the capital gain is reduced to $670,0000 and the capital gains tax gets reduced to $100.5k, or a $37,500 savings in capital gains tax.
  • Thank you Taxpayer Relief Act of 1997!

B. But wait, there’s another break that this woman may benefit from. IRS Code 1014(a) says in part, “the basis of property acquired from a decedent is the fair market value of the property at the date of the decedent’s death.”

So, when the husband passed away last year, the fair market value of the house was $950k. His cost basis is no longer the original $40k he paid (his half of the original cost), but now it is $475k, half the fair market value. With her $40k, the total cost basis of the home is $515k. Applying the $250k of exempt capital gains brings the taxable amount on a $1M sale to just $235k {$1M – (515K costs basis +$250K exemption)}.

At 15%, the capital gains tax is down to $35,250!!!

Knowing these codes brought the tax down a total of over $100,000!

This scenario is just one example of how being aware of various tax codes can significantly impact real estate decisions.

Of course, I always encourage consultation with an accredited tax professional before making any final decisions. However, this is a reminder that I can do more than just market and sell your home. I can point out and connect you with resources that can significantly help you make sound real estate decisions.

If you need a referral to a tax expert for consultation on this and other decisions related to capital gains or selling your home, please contact me.

Reference: Marshall, Parker & Weber LLC

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