Capital Gains Tax-House

Capital Gains Tax-House

My mother had a life estate and put her house in my name. I lived with her. She died in September 2002 the house is sold March 2005. The lawyer wants a high appraisal on property to estimate capital gains to pay after the sale of the house. The the appraiser said it should be price should be low.


What the law says is the value of the house should be its "fair" value! Let's get into a bit of background. Sounds as if mom gave you a deed and retained a life estate. In English (that's the language attorneys try to avoid) she gave you the house but kept the right to stay there as long as she lived. This is a common elder law planning technique (that doesn't make it right for all). By your mom retaining the right to stay in the house for her life (called a "life estate"), if that is in fact what happened, then the house is included in her taxable estate on her demise. Inclusion in her estate under current law (which may change in 2010 with carry over basis under the Bush tax legislation). That means that the "tax basis" (the figure used to calculate gain or loss on sale) is the fair market value of the house on the date of her death or the alternate valuation date (6 months following her death -- see your lawyer and CPA about this). Fair market value is the value the house would be sold between a willing buyer and a willing seller, neither under a requirement to sell, and both with full knowledge of all relevant facts (not a quote of the law, but pretty close). Now, if your mom's estate was subject to federal estate tax at the time of her death, then the higher the value of the house, the greater the estate tax (that could approach a 50% rate). So that would push for a lower value. However, the lower the value of the house, the lower the tax basis to you, and the higher the capital gains rate you pay on sale (assuming you cannot qualify for a 1031 like kind exchange which is likely to be tough, and that you didn't make it your residence so you would qualify yourself for a home sale exclusion). The capital gains rate depending on the state you live in (no specific state advice given) could be say 25%. That sounds to be about half the estate tax rate. So, which is higher? The estate tax or the capital gains tax? Answer depends on the tax basis, state you live in, state tax law, size of mother's estate, and maybe a few other points. Once all those factors are weighed you can determine whether you want a "high or low" appraisal. But, bear in mind that if its anything but a fair value appraisal, Uncle Sam (i.e., the IRS!) may not look favorably on it.

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