Hypothetical tax question

[Sue Doe-Nym]

This is a question I have been thinking about for some time, and it’s something that might be useful, and I don’t have the foggiest idea what the answer is.
Here goes: a couple purchased a waterfront property 25 years ago for $300,000.
Over the years, the property was well maintained, a garage added, new kitchen and bath…nothing extraordinary. Fast forward to 2023: the property is reassessed for $1.5 million. If one of the owners dies…they are husband and wife.. does the surviving spouse now own the property at the stepped up value, I.e., $1.5 million? It would make a tremendous difference as to whether or not to sell the property regarding capital gains taxes, since they haven’t been revised since the 1990s. It also raises the question of whether to hang on to the property and pass the real estate on to the next generation, with no capital gains taxes owed. I would love to hear from folks who know the answers…..interesting stuff to ponder.

[FlyingScot]

Originally Posted by Sue Doe-Nym

This is a question I have been thinking about for some time, and it’s something that might be useful, and I don’t have the foggiest idea what the answer is.
Here goes: a couple purchased a waterfront property 25 years ago for $300,000.
Over the years, the property was well maintained, a garage added, new kitchen and bath…nothing extraordinary. Fast forward to 2023: the property is reassessed for $1.5 million. If one of the owners dies…they are husband and wife.. does the surviving spouse now own the property at the stepped up value, I.e., $1.5 million? It would make a tremendous difference as to whether or not to sell the property regarding capital gains taxes, since they haven’t been revised since the 1990s. It also raises the question of whether to hang on to the property and pass the real estate on to the next generation, with no capital gains taxes owed. I would love to hear from folks who know the answers…..interesting stuff to ponder.

The surviving spouse does not get the stepped up value. But their kids will.

[Resident 2B]

You really should be asking this important question to an estate planner. There are potential big tax consequences, depending on your state of residence. There are also ways to avoid some of these taxes through living trusts, etc. I have been through this. I am not an estate planner or tax expert. Good luck and the sooner you do something, the better.

[joey2665]

Originally Posted by FlyingScot

The surviving spouse does not get the stepped up value. But their kids will.

This is incorrect advice consult a professional


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[DesertDweller]

Originally Posted by joey2665

This is incorrect advice consult a professional


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Agreed. Talk to someone. It will be well worth your time and money.

Here is a good article to give you some initial thoughts.

https://legacyassuranceplan.com/arti...ep-up-in-basis

[Sue Doe-Nym]

I guess my question wasn’t completely hypothetical, though that was my intention. We have gone the trust route, but the dialogue that runs through my mind involves “what ifs “ and which route would be better? In a perfect world, the property would pass on to the next generations, BUT the surviving spouse might choose to sell for a variety of reasons, not always related to money or disability. Loneliness could be a huge factor. Anyhow, interesting subject. Thanks.

[joey2665]

Originally Posted by Sue Doe-Nym

I guess my question wasn’t completely hypothetical, though that was my intention. We have gone the trust route, but the dialogue that runs through my mind involves “what ifs “ and which route would be better? In a perfect world, the property would pass on to the next generations, BUT the surviving spouse might choose to sell for a variety of reasons, not always related to money or disability. Loneliness could be a huge factor. Anyhow, interesting subject. Thanks.

Sue I don’t give tax advice in the general area, I sent you a PM


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[tis]

Nobody owes capital gains until it's actually sold, if that's what you mean.

[jeffk]

I'm not a tax expert and being a spouse changes the inheritance process but I will lead with a couple facts and then speculate.

First, it depends as to where you reside as to the state inheritance tax and I won't have anything to say about that beyond that NH does NOT have an inheritance tax.

Second, the federal exemption on an inheritance is almost $13 Million in 2023 and is indexed for inflation so it continues to increase.

Now the speculation, if you jointly own a home with rights of survivorship, a common situation, when your spouse dies, you "inherit" their half. If their half is less than $13M (total of ALL their wealth), there is NO federal capital gains tax on the inheritance. Further, the value of their half of the property is set to the value at their time of death. You should get a couple of official estimates on the property ASAP to set the value. If you sell the property, half the purchase valuation is now reset to the current amount. If you give it to your kids at the time of your spouses death, their purchase valuation is now current value for the spouse's half but original purchase value for your half.

However, if you pass it along at your death, your estate ALSO gets a $13M exemption and your half of the valuation of the property is ALSO reset to current value. THEN if your kids quickly sold the property, the taxable valuation would be any growth since your spouse died on half of the sale and effectively $0 on your half.


Apparently though, in community property states (22 of the states are, including NH), where property acquired during marriage is the community property of both spouses, the property’s entire basis is stepped up when one spouse dies. This is a question for an attorney as to the laws in your state and the specific nature of the holding of your home.

Plus state tax considerations, if any.

[ApS]

Originally Posted by jeffk

I'm not a tax expert and being a spouse changes the inheritance process but I will lead with a couple facts and then speculate. First, it depends as to where you reside as to the state inheritance tax and I won't have anything to say about that beyond that NH does NOT have an inheritance tax. Second, the federal exemption on an inheritance is almost $13 Million in 2023 and is indexed for inflation so it continues to increase. Now the speculation,

...if you jointly own a home with rights of survivorship, a common situation, when your spouse dies, you "inherit" their half. If their half is less than $13M (total of ALL their wealth), there is NO federal capital gains tax on the inheritance. Further, the value of their half of the property is set to the value at their time of death. You should get a couple of official estimates on the property ASAP to set the value. If you sell the property, half the purchase valuation is now reset to the current amount. If you give it to your kids at the time of your spouses death, their purchase valuation is now current value for the spouse's half but original purchase value for your half. However, if you pass it along at your death, your estate ALSO gets a $13M exemption and your half of the valuation of the property is ALSO reset to current value. THEN if your kids quickly sold the property, the taxable valuation would be any growth since your spouse died on half of the sale and effectively $0 on your half. Apparently though, in community property states (22 of the states are, including NH), where property acquired during marriage is the community property of both spouses, the property’s entire basis[ is stepped up when one spouse dies. This is a question for an attorney as to the laws in your state and the specific nature of the holding of your home. Plus state tax considerations, if any.

Just a fine point, but "Right Of Survivorship" can exist among family members--or anybody else.

[Biggd]

Originally Posted by Sue Doe-Nym

This is a question I have been thinking about for some time, and it’s something that might be useful, and I don’t have the foggiest idea what the answer is.
Here goes: a couple purchased a waterfront property 25 years ago for $300,000.
Over the years, the property was well maintained, a garage added, new kitchen and bath…nothing extraordinary. Fast forward to 2023: the property is reassessed for $1.5 million. If one of the owners dies…they are husband and wife.. does the surviving spouse now own the property at the stepped up value, I.e., $1.5 million? It would make a tremendous difference as to whether or not to sell the property regarding capital gains taxes, since they haven’t been revised since the 1990s. It also raises the question of whether to hang on to the property and pass the real estate on to the next generation, with no capital gains taxes owed. I would love to hear from folks who know the answers…..interesting stuff to ponder.

The question should be, do I get the $500,000 capital gains deduction or the $250,000 capital gains deduction. You will be paying some capital gains if you sell.

[phoenix]

All correct a separate question is if one spouse dies and the other wants to sell they would avoid the tax on the gain up to the assessed value at the time of first death. They should file an estate tax return to get it on the record

[Shreddy]

Being a tax attorney, I always enjoy when these questions pop up and seeing the answers of the general public. With that said, I'll also echo what's been previously been said...seek professional advice from a CPA/attorney who specializes in this area. The benefit will significantly outweigh the cost given the "hypothetical" fact pattern

[LIforrelaxin]

As all have discussed, the right thing to do is seek qualified advice. There are lots of in and outs that can be considered.

For the most part when a spouse dies there is very little to worry about, unless things are only in the name of the spouse that dies. Then it it can get interesting if there is considerable equity in only one name....

As for what type of Step up in value happens when the property passes on to the next generation, well it is all a mater of timing... My mother passed on a few years ago, just before the last round of unbelievable value increases around the lake... So well we got a step up in value, we still are left with considerable capital gains should we sell.....

[John Mercier]

Originally Posted by Shreddy

Being a tax attorney, I always enjoy when these questions pop up and seeing the answers of the general public. With that said, I'll also echo what's been previously been said...seek professional advice from a CPA/attorney who specializes in this area. The benefit will significantly outweigh the cost given the "hypothetical" fact pattern

What is interesting is the mixing of the inheritance tax, with the capital gains tax, and the primary home exemption.
My understanding is these are all different.

[Shreddy]

Originally Posted by John Mercier

What is interesting is the mixing of the inheritance tax, with the capital gains tax, and the primary home exemption.
My understanding is these are all different.

Very much so. The intricacies of the code are so unique but lend themselves to so many opportunities to be strategic. The Honorable Learned Hand said it best in several different cases...

"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes...Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant."

[camp guy]

An extraordinarily high percentage of the population has, truly, no understanding of the immensely complicated Tax Code, both State and Federal, and yet, an extraordinarily high percentage of these people rattle on about taxes (of all types). In my humble opinion, the best answers you can get regarding Tax Code issues is from an attorney specializing in Tax Code law with whom you can sit down in a face-to-face setting and fully discuss your specific, personal issues. All other forms of information gathering will surely lead to a misunderstanding and misapplication of the Tax Code, and you, yourself will still have questions.

[ITD]

Originally Posted by camp guy

An extraordinarily high percentage of the population has, truly, no understanding of the immensely complicated Tax Code, both State and Federal, and yet, an extraordinarily high percentage of these people rattle on about taxes (of all types). In my humble opinion, the best answers you can get regarding Tax Code issues is from an attorney specializing in Tax Code law with whom you can sit down in a face-to-face setting and fully discuss your specific, personal issues. All other forms of information gathering will surely lead to a misunderstanding and misapplication of the Tax Code, and you, yourself will still have questions.

And it's a very sad state of affairs that it is so complicated you need an attorney to explain it to you.

[John Mercier]

Be happy it is in the US and your a US resident.

Polyclad used to be owned by Cookson, traded on the London Exchange in British Pounds. Determining the value of your ESOP wasn't overtly difficult... navigating the sale and taxation was a uniquely trying experience.

Company made the buy-in experience pleasant, and the cash-out was on our own.

I am still wondering how intricate the ROTH/Traditional IRA system will be as they play around with the rules each year.

[longislander]

I'm probably going to be sorry for commenting. I'm not an attorney, but do have paralegal certification, since 1998. Only an attorney can legally give legal advice.

If one of the owners dies…they are husband and wife.. does the surviving spouse now own the property ...

First, is the property deed in both husband and wife's name; hopefully, with joint tenancy with rights of survivorship? If yes, then the surviving spouse is sole owner of the property (homestead) and then, any other federal or state law applies accordingly.

Just noticed:

We have gone the trust route,

How about a Trust attorney!

https://ansellpa.com/application/fil...RUSTS.2018.pdf

[Sue Doe-Nym]

At the risk of being labeled a smart###, I would depart for the pearly gates first, leaving the decisions to my husband….. the perfect scenario would be for the last survivor to leave the property upon his death to the next generation, thus avoiding lots of headaches and providing years of enjoyment. However, the down side of all that are potential disagreements among the heirs over almost everything pertaining to the property, which is sad.
Anyhow, interesting discussion.

[C-Bass]

Originally Posted by Sue Doe-Nym

I guess my question wasn’t completely hypothetical, though that was my intention. We have gone the trust route, but the dialogue that runs through my mind involves “what ifs “ and which route would be better? In a perfect world, the property would pass on to the next generations, BUT the surviving spouse might choose to sell for a variety of reasons, not always related to money or disability. Loneliness could be a huge factor. Anyhow, interesting subject. Thanks.

If the reason for selling is not for money or health reasons, you may consider letting the next generation take over the responsibilities for the property if they are willing. For the most part the next generation will never be able to afford to own waterfront. The bar is set far too high for middle/higher income earners to ever be able to afford to live on the water. The people who can afford waterfront right now are the very wealthy and everyone else is shut out.

[Major]

Originally Posted by John Mercier

Be happy it is in the US and your a US resident.

Polyclad used to be owned by Cookson, traded on the London Exchange in British Pounds. Determining the value of your ESOP wasn't overtly difficult... navigating the sale and taxation was a uniquely trying experience.

Company made the buy-in experience pleasant, and the cash-out was on our own.

I am still wondering how intricate the ROTH/Traditional IRA system will be as they play around with the rules each year.

Small world! I worked for Cookson Electronics, which was owned by Cookson Group plc and owned Polyclad, from 2000 to 2003. I cashed out my Cookson options in 2004. I don't remember a particular tax issue. Hopefully I did it correctly!

[FlyingScot]

Originally Posted by Sue Doe-Nym

We have gone the trust route, but the dialogue that runs through my mind involves “what ifs “ and which route would be better?

Having just been chastised, correctly, for my glibness, I will be more careful. But...

In certain trust situations, there is no step up at death. (In plain English--in these situations the Trust owns the house and the Trust is still "living", so...) You should ask your professional about this to see if it applies to your trust

[John Mercier]

Originally Posted by Major

Small world! I worked for Cookson Electronics, which was owned by Cookson Group plc and owned Polyclad, from 2000 to 2003. I cashed out my Cookson options in 2004. I don't remember a particular tax issue. Hopefully I did it correctly!

They were using ADRs by then.

The ESOP for us came in the mid-90s, and first round no one realized the limitations.

[Major]

Originally Posted by John Mercier

They were using ADRs by then.

The ESOP for us came in the mid-90s, and first round no one realized the limitations.

Good to know. Did you know Joe S., Dick M., Steve O. or Bill V.? Very nice people there.

[Mr. V]

Oh what a tangled web we weave, when from taxes we seek relief...

How true that is.

[John Mercier]

All Polyclad employees knew the executive staff. Richard wanted it that way.
I think he may have gotten it from Mike. When Mike owned the company, and for the five year tenure that he led under Cookson, he would walk the Franklin plant about once a week and talk to everyone. Joe would hardly ever be seen. He would join the crews during holiday parties.

Even after taking the presidency, Joe was mostly seen during holiday parties; but by that time we had moved from the three small plants to international, so nobody really expected to see him as much as they had Mike; though most of the old timers would bring it up every so often.

Ostrow, I would see all the time... but that was mostly the interaction between engineering and quality control. Varnell only occasionally as I had to review the quality of some new processing changes that would come about under his tenure. He would usually come to me with Steve.

Not really sure who Dick M. is...
We had several Richard's that worked for us over the years... and I doubt it could be Dick McDonald. I don't remember him being with the company in 2002.

[Major]

Originally Posted by John Mercier

All Polyclad employees knew the executive staff. Richard wanted it that way.
I think he may have gotten it from Mike. When Mike owned the company, and for the five year tenure that he led under Cookson, he would walk the Franklin plant about once a week and talk to everyone. Joe would hardly ever be seen. He would join the crews during holiday parties.

Even after taking the presidency, Joe was mostly seen during holiday parties; but by that time we had moved from the three small plants to international, so nobody really expected to see him as much as they had Mike; though most of the old timers would bring it up every so often.

Ostrow, I would see all the time... but that was mostly the interaction between engineering and quality control. Varnell only occasionally as I had to review the quality of some new processing changes that would come about under his tenure. He would usually come to me with Steve.

Not really sure who Dick M. is...
We had several Richard's that worked for us over the years... and I doubt it could be Dick McDonald. I don't remember him being with the company in 2002.

Joe was tight with Ray Sharpe, so that's probably why you didn't see him much. He spent a lot of time in Providence. Steve is a sweetheart. Unfortunately, Bill passed away about 7 years ago from cancer. Dick M. is Richard Mahoney. Great guy.

I never met Mike, but he was friends with my dad. Some legendary stories about him!

[Descant]

Originally Posted by C-Bass

If the reason for selling is not for money or health reasons, you may consider letting the next generation take over the responsibilities for the property if they are willing. For the most part the next generation will never be able to afford to own waterfront. The bar is set far too high for middle/higher income earners to ever be able to afford to live on the water. The people who can afford waterfront right now are the very wealthy and everyone else is shut out.

I agree with this, since it has worked well for our family. We transferred ownership to a realty trust in 1986. Gifts over a couple of years, so no tax at that time. Since then, three of the original shareholders have died, and two gave their shares to a younger generation. There are several provisions to prevent personal gain by sale.

When you draw up an initial plan, it is worthwhile to go to another firm and pay for a couple of hours for a second opinion. Emphasis on "another firm".

[John Mercier]

Forgot about Mahoney.

Mike was a character.

[retired]

Since the property is owned jointly, the surviving spouse gets a stepped up basis for only half of the value. He/she should consider living in it as their primary home long enough to get the $250,000 exclusion on the gain. If they plan on keeping it until death and passing it on to the kids, then they will get a full step up in basis.

[jeffk]

Originally Posted by retired

Since the property is owned jointly, the surviving spouse gets a stepped up basis for only half of the value. He/she should consider living in it as their primary home long enough to get the $250,000 exclusion on the gain. If they plan on keeping it until death and passing it on to the kids, then they will get a full step up in basis.

As I previously noted, IF you are living in a COMMUNITY PROPERTY STATE, like NH, then it is likely the surviving spouse will get a FULL stepped up basis because the ownership in such a state is considered to be 100% BY EACH SPOUSE.

There may some nuances, such as when the property was purchased, etc. Therefore, as mentioned by many, if you want a definitive answer FOR YOUR SITUATION, CONTACT AN ATTORNEY in the state where you live. If the property is owned in a different state than where you live, you might want to talk to an attorney in the state where the property is as well.

[phoenix]

that's what my tax acct said also full step up and that's what i did on the estate tax return i filed.

[longislander]

Discuss "homestead property" and is the deed "joint ownership with rights of survivorship" with an attorney.

NH is not a community property state. Also confirm with an attorney.

[jeffk]

Originally Posted by jeffk

As I previously noted, IF you are living in a COMMUNITY PROPERTY STATE, like NH, then it is likely the surviving spouse will get a FULL stepped up basis because the ownership in such a state is considered to be 100% BY EACH SPOUSE.

There may some nuances, such as when the property was purchased, etc. Therefore, as mentioned by many, if you want a definitive answer FOR YOUR SITUATION, CONTACT AN ATTORNEY in the state where you live. If the property is owned in a different state than where you live, you might want to talk to an attorney in the state where the property is as well.

Mea culpa! I apologize for incorrect information. It seems that NH is NOT a community property state. When I originally checked, several seemingly reliable sources indicated it was. Now I am seeming more sources that say it is NOT!

CHECK WITH AN ATTORNEY!

[longislander]

And ask about possible confusion with an "equitable distribution" state, which NH is.

Further clarification with the attorney that "equitable distribution" is not the same as "equal distribution".