Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

May 13, 2013
What is the tax basis in a property received by gift or inheritance?

Q: My wife and her sister were deeded their mother's home 15 years ago. Their mother bought the home 45 years prior. What would be the tax base for determining capital gains?

Sam
Sacramento

A: Your wife's tax basis will depend on whether she received the property by gift or by inheritance. Let's start with the assumption that she received it by gift.

In general, the donor's basis (cost plus improvements in the case of purchased real property) becomes the donee's basis when property is received by gift. The donee "steps into the shoes of the transferor" with one exception. If, at the time of the gift, the "fair market value" of the property interest is less than the donor's tax basis in the interest, then the fair market value is the donee's basis for the purpose of calculating a loss on the subsequent sale of the interest.

Fair market value is defined as the amount a willing buyer would pay a willing seller, both having reasonable knowledge of the facts concerning the property and neither being under duress to buy or sell.

For example, if your wife's mother purchased the home in question for $50,000 and added $20,000 in improvements (expenditures that add value to the property or extend its useful life), her tax basis would be $70,000. Your wife receives a gift of a 50% interest in the home at which time the fair market value of the home is $60,000.

If the property was to sell for $90,000 net of selling expenses, your wife would have a gain of $10,000 calculated as follows: Her portion of the sales price, $45,000, less her basis in her 50% interest (50% of $70,000) of $35,000, resulting in a gain of $10,000.

On the other hand, if the property was to sell for $50,000 net, your wife would have a loss of $5,000 calculated as follows: Her portion of the sales price, $25,000, less 50% of the lesser of her mother's tax basis, $35,000 (50% of $70,000) or the fair market value at the time of the gift, $30,000 (50% of $60,000), resulting in a loss of $5,000 ($25,000 less $30,000).

If your wife received her 50% interest by inheritance, then her tax basis is the fair market value of the 50% interest that she received as of the date of her mother's death unless her mother paid estate tax and the executor made the alternate valuation date election. If that is the case, which is rare, then the tax basis would be the fair market value of the 50% interest in the property as the the date six months after the date of death. This election is only available if estate tax is due and the election results in a reduction in the tax.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



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