Discussion:Real Property / Stepup / Trust
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Real Property / Stepup / Trust
| 17 September 2007 | |
| I hope that this is an appropriate question for this forum.
Husband and wife own real property, a co-op apartment in New York. Husband dies. Wife is unsure whether she will stay or sell and relocate. She is leaning towards selling. Husband's half of the apartment passed to her at his death. Should she accept or disclaim? If she disclaims, his half would go to a trust to benefit her and eventually their two children. The basis in the apartment is $280,000. The apartment is valued at $1,800,000. So we have two halves. One half has a basis of $140,000 then other has a basis of $900,000, for a total basis of $1,040,000. If she sells without disclaiming she will pay a capital gain on the gain of $760,000. If half goes to the trust and the apartment is sold she will pay tax on her half of $760,000 and the trust will pay no capital gains tax since its step-up basis is equal to the proceeds. So it seems best for her to disclaim and have the husband's share of the apartment go to the trust. Is this correct? Thanks. | |
Bushmaster (talk|edits) said: | 17 September 2007 |
| Her step up on inheritance will also equal 900k. She also gets either the 250k exclusion or 500k depending. Her half is $900k. Her basis is 140k. Gain is 760k regardless. | |
| 17 September 2007 | |
| So the numbers should be if she sells owning the whole apartment: $1,800,000 sales price, reduced by her step-up basis of $1,040,000, leaving $760,000, less the exclusion of $500,000, for gain of $260,000. If the trust owns half, it pays no tax and she pays tax on $900,000 less basis of $140,00 leaving $760,000 less $250,000 for gain of $510,000. So better for her to own the whole thing? | |
Bushmaster (talk|edits) said: | 17 September 2007 |
| IDK. Will she get the $500k exemption when the condo sells or will it be 250k? If only 250k, I don't think it matters who owns the other half. | |
| 17 September 2007 | |
| Right. She'll only get 250K, meaning that her numbers would be 1.8 - 1.04 - 250K for a gain of $510,000. Same as the trust. So no benefit in dealing with trust.
Thanks. | |
| 17 September 2007 | |
| Bit more complicated. NY begins taxing estates at $1 million and the first $100K or so end up being taxed at the Federal rate of 45%. The individual can reduce gain by the amount of closing costs and commissions; the trust could end up with a capital loss. To get the deduction for estate administration expense against income, the money must be paid from amounts going to the credit shelter trust. I could go on, but you might consider seeking professional advice. | |
| 17 September 2007 | |
| Why must the deduction for estate administration be taken from the amount going to the credit shelter trust? Would she not receive the same deduction on her 1040? | |
| 17 September 2007 | |
| The marital deduction for estate tax purpose is limited to the amount surviving spouse actually gets. | |
| 17 September 2007 | |
| Yes, Dennis, I understand that the marital deduction is limited to the amount the surviving spouse receives, but why is the deduction for estate administration limited to the amount that goes to the credit shelter trust? Oh, I see, if all goes to Wife, the marital deduction wipes out the need for any other deductions. But can't she claim some on her own 1040 as a miscellaneous itemized deduction? | |
| 17 September 2007 | |
| It is not an itemized deduction unless it passes as excess deductions on the final 1041. Itemized deduction absent pass through would have to relate to income, not assets. The election to take administration expense is either/or, but does not change the fact that they are paid. If paid from wife's share and not deducted on estate tax return you end up with a taxable estate. | |
| 17 September 2007 | |
| Note also that the will has to specifically have a clause that puts disclaimed assets into the trust, otherwise they can't get there. | |
| 17 September 2007 | |
| It does. On balance, then, with the limited facts, you believe that disclaiming to the trust is the correct move? | |
| 17 September 2007 | |
| I would only be guessing. There are a lot of numbers to crunch. Size of the credit shelter trust is meaningful, as is size of surviving spouse's estate. If the trust is going to be fully funded one way or another and surviving spouse's estate is large, keeping the tax liability on her return will reduce her estate. | |
