Real Estate Matters: Heir considers using online tools to determine valuation of inherited property
Q: My dad purchased an investment property in 2006 for $150,000. He put my name as joint owner with him. His intent was for me to become the sole owner of the property after his death. He died late last year. Prior to his death, he managed the property and did everything that had to do with the property. He took all the tax benefits and tax deductions having to do with it.
When he bought the property, he and I took out a mortgage, but the lender used his credit only to approve the loan. I have never reported anything in my tax return having to do with the property. With his death, I inherited his share of the property and am now the sole owner.
Do I need to get an appraisal for the home, or can I use online tools to figure out what it’s worth? Many online websites show the home’s value at around $130,000. Can I use that value to set the value of the home when I sell it down the line? Do I only get 50% of step-up value?
I’d appreciate any information you can provide on this issue that can give me some insight into the tax issues involved.
A: First, please accept our condolences on the loss of your father. If you’ve read some of our past columns, you know that we are not fans of how your father set up his financial affairs with regard to this property. As a general rule, we don’t think parents should put real estate in their children’s names (even if they share ownership) solely for estate planning purposes.
Let’s dive into specifics: You and your dad purchased the property for $150,000. Even though your dad took all the tax benefits on the property, his share of the property when he purchased it was worth $75,000. Your share was worth the same. Your dad used the property as an investment property and received rents from the tenants, spent money on repairs and depreciated the property on his income tax returns.
When your dad depreciated the property, his basis for income tax purposes went down. If you and he had sold the property, he would owe tax on the depreciation he took over the years. When he died, you inherited his 50% share of the property at its stepped-up basis.
What does that mean? You inherit his share of the property at its value at the time your dad died. That’s generally a good thing, especially if the property in question has risen in value. If you inherit the property at a higher value, you only owe taxes on the increase in value from the date your dad died.
If you sell your dad’s property within a year or so of his death, the sale price will set the value for the property, so you wouldn’t pay tax on the sale of his share. However, if you sold at a price point higher than the purchase price you might owe tax on your share of the profits.
What happens if, as you suspect, the property is worth less than the purchase price?