Orange County Estate Planning Lawyer Blog
AN APPRAISAL IS NEEDED UPON DEATH OF A PROPERTY OWNER. A routine part of trust administration or probate administration is to obtain an appraisal of each property owned. This is for income tax reasons. Because the income tax basis is increased “stepped up” upon death to fair market value an appraisal is needed to prove the exact date of death value. A licensed appraiser is needed to do this. A realtor’s letter of value opinion is not sufficient. There are licensed residential appraisers and licensed commercial property appraisers. Aside from tax purposes, an appraisal is also useful to determine actual value to help to deciding what to do with a property.
INCOME TAX “BASIS” CONCEPT. Under our system of federal and state income tax, if the property is sold before death for more than what was pay for it then there is a capital gain. There are special rates which apply to capital gains depending upon one’s tax bracket. To compute capital gains, you subtract the income tax basis of the property from the net selling price. The income tax “basis” is what was paid for the property in the first place minus any depreciation and adding any expenditures for capital improvements.
DEATH AFFECTS THE BASIS. The basis of property acquired from a deceased person’s probate estate or trust is generally it’s “fair market value” on the date of the decedent’s death. Thus, the children who inherit a property from their parents through a trust or through a probate proceeding will have a date of death income tax basis. This is known as the step-up in basis at death. An appraisal is necessary to legally prove the date of death value.
