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The Importance of Knowing the Basis of an Asset

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A question that comes up frequently with my clients is: “Why did my attorney tell me to get my real estate appraised when my spouse passed away?”  Let me explain why I regularly make this recommendation:

You and your spouse own your assets together.  When one of you dies all the assets pass to the surviving spouse either by right of survivorship or a living trust.  If your estate is under $1,000,000.00 there may be very little for you to do.  However it is important to keep a record of the value of capital assets such as real estate, stocks, and businesses as of the date of the first spouse’s death.  The reason to get the appraisal is to establish the basis of the asset as of the date of death, so when you sell the asset your accountant or CPA will be able to determine the capital gains tax on the asset.

At a person’s death certain assets such as real estate, stock and businesses get a stepped up basis as of the date of death or 6 months after the date of death if alternative valuations are used.  Knowing the basis of the property is important when you sell the asset or if you depreciate the asset.

Let me give you an example of what I am recommending:

Jane and Tom purchased a home in 1970 for $36,000.00.  Assuming no adjustments have been made, $36,000 is the basis of the property while they both are living.  Jane and Tom have lived in the home since they bought it.  Jane recently passed away.  The home is now worth $500,000.00.  Tom’s new basis in the property is $268,000.00.  The new basis is comprised of $18,000.00, which is ½ of the original purchase price, $36,000.00 and the stepped up basis of Jane’s ½ interest in the property as of the date of her death which is $250,000.00.  Tom continues to live in the home for many years.  When he sells the home he will need the basis amount.  Tom will have to prove to the IRS and the State of Maryland the value of the home when he and Jane first purchased it and the value of the home as of Jane’s date of death.  It is easier and less expensive to establish the value of the property at the time of Jane’s death rather then waiting years when Tom sells the home.  A historical appraisal can be expensive.

So what do you do with the appraisal once you receive it?  You give a copy to your tax preparer and keep the original with your important papers to be retrieved when you sell the property.

 

Sinclair Prosser Gasior
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