beneficiary deeds/taxes

[fwjone819]

If a person dies and leaves property to family members by beneficiary deed, how does this affect taxes for the family member?
Is there a taxable event when they aquire the land (for estates under 500,000 dollars), when they sell the land or what?
For instance, I receive a beneficiary deed on the death of my parent. At that time, do I have any IRS issues? I get an appraisal of land when beneficiary deed kicks in. If I sell the land, do I use that appraisal as a basis since I didn't "purchase" the land?
thanks for any help
P.S. It's probably important to note that until this issue cropped up, my taxes have always been very simple. "job paid me this, I paid in this much, and I owe this much more" type of thing.

[tallguy]

I think he is asking more if he has to pay taxes on the inheritance. That answer should be no. The parent's basis in the property is what they paid plus any improvements they made during the course of ownership. When the property passes as the result of a death, the beneficiary receives a "stepped-up" basis in the property. The beneficiary's tax basis is generally the fair market value at the time of the decedent's death. Should they choose to sell, there is no capital gain based on the parent's lower basis, but would possibly be depending on the sales price minus expenses compared to the stepped-up basis for the beneficiary. The exclusion from gain of the first $250,000 (or $500,000 for married filing jointly) would not apply unless they moved into the house for two years, I believe. I'm certainly not a tax pro, but that is my understanding.

[mwcpa]

fw....

If I can piece together the string of comments/questions you made...

Generally, upon the passing of a person (not counting 2010) beneficiaries receive assets at the fair market value as of the date of passing (or the alternative date, a topic that can be a little confusing and too long to discuss here). In the case you note, if the home/land was 500,000 then the new basis to you is 500,000. Have an appraisal on hand as it will be up to you to prove/defend the valuation upon an IRS inquiry.

If you were to sell the home/land for say 600,000 a few years later your taxable gain would be 100,000, which is the 600,000 selling price less the basis in the property you have of 500,000 (for ease I left out any qualified capital improvements you may have made, business use of the property while in your hands and closing costs). Under the current federal income tax law this gain would be subject to the maximum tax rate of 15% (assume no business use while you held the property and AMT).

Estate tax comes into play for estate with net values over 5.000.000 in 2011 and lesser amounts in year before 2010. In 2010, there was no federal estate tax, but there was also a limited ability to step up the basis in assets. Some state have estate/inheritance taxes based on lower amounts (example NY) and who the beneficiary is (example NJ)

[Deleted]

Also be sure to look up your state inheritance laws. I inherited from an aunt and had to pay 10% to the state. I wouldn't have had to pay anything if it had been a parent, but I would still check. I know each state has different rules and don't know if any tax inheritances going to the decease's children.

[fwjone819]

Sorry for the confusion.
Family member's father passed Dec, 2010. There was a beneficiary deed for the four siblings for the farm (estimating 60 acres or so). I told them they needed to have the place appraised right away so if they decide to sell later on they have a starting place to figure capital gains tax. They told me no, that is based on what you pay for something and since they didn't "buy the land", they would have to pay taxes on the full amount if they sold.
I just didn't want them to lose out on any monies because they didn't do stuff properly. None of them have ever had much and they are a hard working group.

So thanks for all your replies and sorry I wasn't clear.

Clarifying: they inherited the land, if they sell capital gains tax would be based on an accurate current appraisal done at time of acquisition. correct?

[tskeeter]

fw, I think there are two issues here. Estate or inheritance taxes, and the value of the property which would be used to compute any gain on the property when the property is sold.

The first issue is estate or inheritance taxes. Since the person died in 2010, as mwcpa points out, there are no federal estate taxes on the estate. However, there may still be state level estate or inheritance taxes that should be paid. Since laws vary by state, the family should get advice from an attorney or CPA in the state where their family member lived.

The second issue is what value to use for the property when calculating any gain when the property is sold. Again, mwcpa is right on the mark. For situations where the person died in 2010, the value to use as the cost when calculating any gain is what the person who died paid for the property (not what the heirs paid for the property). So, if the deceased paid $6,000 for the property and the heirs sell the property for $90,000, the gain would be $84,000 ($90,000 selling price - $6,000 cost = $84,000 gain).

As these heirs do not appear to know very much about handling estates, etc., they should get the advice of an estate attorney. The attorney can help them understand what the laws are about administering the estate and help them avoid mistakes that will result in penalties or additional legal complications. (Some states require that an estate tax return be filed within 9 months of the death, so time may be getting short.)

[mwcpa]

"For situations where the person died in 2010, the value to use as the cost"

Not necessarily true, the general rule for 2010 is that a "modified" cost is used....there is a step of up to 1.3 million of value as allocated by the executor/rix or administrator of the estate (need a form 8939, which is not yet available www.irs.gov/newsroom/article/0,,id=237978,00.html).... but Estate Tax Provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 allows one to apply the "new" estate tax rules retroactively to 1-1-10 (a form 706 is needed)....

This can get confusing, it is best to see a pro to determine what is best.....

[Deleted]

Not every state uses Beneficiary Deeds which is why most people many not be aware of them.

They can be a nifty tool for smaller estates to avoid probating the property if the property wasn't included as part of a Trust. An owner of a property executes a Beneficiary Deed to the future heirs but title doesn't actually pass until death of the owner. So the beneficiaries would inherit based on the stepped up value (e.g. the value at time of death, not the acquisition costs) as MWCPA points out in post #3.

And I agree with everyone else, your friends need the help of an estate attorney licensed to practice in the state in which the deceased lived.