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Old 10-17-2010, 06:38 PM
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Question Both Inheriting and Selling a Home in 2010 - HELP!

I am in a quandary and reaching out here for information. I searched the threads but couldn't find anything specific to my situation

I've inherited a home this year that I'd like to sell. However, because of the step-up basis being eliminated in 2010, I am trying to get a handle on the tax implications.

The original cost of the home in 1990 was $85k. The most recent appraisal was $452k and I can easily sell it for $500k. I live in NY City (8.875% S&L tax) and the home is located there also.

As I understand it, because the death/inheritance took place in 2010, using a selling price of $500k I will have a capital gain of $415k as opposed to the $48k it would have been in a previous year, correct?

Is there ANYTHING I could do to avoid/lessen this huge tax implication?

I really would rather sell it but would holding it for a relatively short period change anything?

For the record, I am currently unemployed and will have an annual income of appr. $25k.

Thanks in advance for any help!


Last edited by TaxGuru : 10-30-2010 at 10:42 AM.


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Old 10-30-2010, 08:21 AM
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" As I understand it, because the death/inheritance took place in 2010, using a selling price of $500k I will have a capital gain of $415k as opposed to the $48k it would have been in a previous year, correct? . . . I really would rather sell it but would holding it for a relatively short period change anything? "-----> Correct; the original cost of the property is $85,000, and if you sell it in 2010 for $500,000 then LTCG is : $500,000-$85,000=$415,000. As you pointed out, there is no estate tax for those who die in 2010 and teh stepped up baisis is eliminated in 2010.So, the cost basis of the property is $85,000( original cost basis in 1990).What I have learned is that the stepped-up basis rules for inherited property will be replaced with a modified carryover basis system in 2010. Under the new law, there will be a modified carryover basis system, where inherited assets will keep the deceased’s basis.

" Is there ANYTHING I could do to avoid/lessen this huge tax implication? "---> As you assumed, the amount of your LTCG is $415,000 and you should pay CGtaxes, capital gain taxes, to both Federal and your State governments. For Federal level CG tax, if your marginal tax bracket is below 15%(10% and 15%), then you pay 0% on the LTCG generated from the property in 2010.If your marginal tax rate is higher than 15%( 20%, 25%.., so on in 2010), then you should pay 15% on $415,000 in 2010. however, the LTCGrate will be 10% not 0% in 2011 if your marginal tax rate is below 10%. If your marginal tax rate is higher than 10%( 15%, 20% . . so on), then you MUST pay 20% of LTCG tax in 2011.No more 0% rule in 2011. So, you are better off paying your LTCG taxes, I mean both Federal( if your marginal tax rate is higher than 15% as said above) and State CG taxes in 2010. If you were to sell itand pay the taxes in 2011, then as said above, you 'd have to pay more LTCG Taxes to the IRS. There is no inheritance tax in NYS.


As you can see, current law provides an exclusion of up to $250,000 in gain on the sale of a principal residence once every two years( by owning it for five years, I guess). The exclusion is doubled for a married couple so that they can exclude up to $500,000 in gain from their main home. If the givers were able to satisfy the requirment, and sold it as MFJ and gave the proceeds, LTCG of $415,000, to you as a gift, then you can invest the proceeds to purchase your home without paying any Federal and State level CG Taxes(A donee pays no gift tax). In this case, the givers might be subject to their gift taxation if they had made huge gifts before(>$1.13,000 million if your are their oly child). However, this option is too late to adopt.
In my opinion, the best choice for you is to pay the LTCG taxes this year before 2011, I guess.

" For the record, I am currently unemployed and will have an annual income of appr. $25k."-----> As you said, if you are Single, then your marginal tax bracket 'd be probably 15% and you pay no LTCG Taxes on $415,000 to the IRS in 2010 , so you should sell it and pay LTCG Tax to only NYS. However, it is up to you! Good luck.


Last edited by Wnhough : 10-30-2010 at 08:32 AM.


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Old 11-02-2010, 01:23 PM
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Thumbs up

Thank you so much Wnhough for taking the time to post that very thorough reply. I had no idea about that 20% LTCG in 2011. So it looks like I'd be much better off selling in 2010. Now the only issue is getting a buyer and closing before year's end. <augh!>

Again, thank you for your help! It's much appreciated!



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Old 11-02-2010, 02:10 PM
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No problem; to confirm it, You can visit the web site( take note on "Capital Gains Taxation in the United States from 2003 forward" :Capital gains tax in the United States - Wikipedia, the free encyclopedia



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Old 11-28-2010, 02:08 PM
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Exclamation

Someone just brought this matter of the $1.3mil consideration. So if I read this correctly, because the home is worth $500k, I should get the step-up. I think! Why must they make this stuff so difficult!
Current law provides a basis tax break for inherited property. Heirs can "step up" the basis of any property they receive to its fair market value on the day that the original owner died. But in 2010, heirs must assume, or carry over, the departed's basis in the property. This, of course, has tax ramifications. Since some property will have greatly appreciated over the years, lawmakers decided to give heirs a bit of basis consideration: $1.3 million of inherited property receives a step-up in basis

Full article here: Bankrate Estate tax elimination could cost heirs
Just addng this as an FYI.



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Old 11-28-2010, 09:13 PM
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"lawmakers decided to give heirs a bit of basis consideration: $1.3 million of inherited property receives a step-up in basis"----> I didn't even think about this part as you pointed out!!! Thank you for reminding me of this proviison.As you know, for ONLY the year 2010, "step-up", I mean FMV basis rule, was replaced by "carry-over basis",original cost rules. Carry-over basis means the original basis of inherited property, in this case $85,000, your mom's original cost of the property, not FMV(appraisal value in 2010) of $500,000, remains the same as it was for the deceased owner; which increases the amount of capital gain upon the sale of the property because its amount is usually lower than FMV. However, there is some minor relief that has allowed for a basis adjustment on property inherited by a non-spouse. When property is inherited, the heir can choose to take a "step-up" in basis for $1.3 million of the property. For example, your basis of the property is $85,000 and FMV of the estate property is $500,000, so your new basis, under the sec #1022, will be $500,000( your new basis can not exceed fair market value, $500,000; $138,5000>$500,000; the basis of property acquired from your mom isthe lesser of (i) the decedent’s adjusted basis, $1,385,000 or (ii) the fair market value of the property at the decedent’s death, $500,000. ). As a result, you will receive a basis that is stepped up from carryover basis to fair market value( from $85,000 to $500,000).Then if you sell the property for $500,000, there'd be no LTCL or LTCG.


United States Code: Title 26,1022. Treatment of property acquired from a decedent dying after December 31, 2009 | LII / Legal Information Institute



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