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GruffMD
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Partial Real Estate Inheritance but with a Life Estate

My mother died on 30 October, 2016, and I was the beneficiary of her 50% equity in house that she and my stepfather owned in Florida.  I did not have access to those funds immediately because they were tied up in a life estate interest to my stepfather until his death or vacating the property.  He is now selling the property for $450K.  According to Zillow the value of the home in October 2016 was $258K. Based on those numbers I calculate my potential capital gains at (50%) x ($450K) - (50%) * ($258K) = $96K.

 

First question: Will I have to pay long term capital gains taxes on the $96K, since I did not have a choice in the liquidation of assets until now because the assets were tied up in a life estate to my stepfather?

Second Question: Are Zillow estimates valid for determining the cost basis, OR if audited do I require a documented appraisal which would cost me $500?

Last Question: My primary residence is in MD?  If I do have to pay long term capital gains taxes, will I have to pay federal, Maryland, and Florida taxes on the capital gains?

 

Thanks for any assistance!

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3 Replies

Partial Real Estate Inheritance but with a Life Estate

First question: Will I have to pay long term capital gains taxes, since I did not have a choice in the liquidation of assets until now because the assets were tied up in a life estate to my stepfather until he either passed away or vacated the property, which is is now doing on 9/9/2022?  All inherited property is automatically long term even if you sell it within one day of the decedent's death.

 

 

Second Question: Are Zillow estimates valid for determining the cost basis, are if audited do you require a documented appraisal which would cost me $500?   Zillow estimates can be used however  the selling realtor should be able to give you a historical estimate of DOD value which would be better and stand up in an audit better. 

 

Last Question: My primary residence is in MD?  If I do have to pay long term capital gains taxes, will I have to pay federal, Maryland, and Florida taxes on the capital gains?  You will have to pay MD taxes on all income during the year no matter where is comes from but as a consulation  Florida doesn't have any state income tax to worry about. 

Partial Real Estate Inheritance but with a Life Estate

First question: Will I have to pay long term capital gains taxes, since I did not have a choice in the liquidation of assets until now because the assets were tied up in a life estate to my stepfather until he either passed away or vacated the property, which he is now doing on 9/9/2022?

yes 

 

Second Question: Are Zillow estimates valid for determining the cost basis, are if audited do you require a documented appraisal which would cost me $500?

see this thread that comments on Zillow valuations or do your own web search. personally, i've looked at Z-valuations of property on my block and across the street. they are almost all identical while I know that some of the houses have made substantial improvements and when some were put on the market the asking price was nowhere near Z's estimate. I would spend the $500 but it's up to you

https://www.maxrealestateexposure.com/are-zillows-home-value-estimates-accurate/#:~:text=Assessed%20... 

 

 

Last Question: My primary residence is in MD? If I do have to pay long term capital gains taxes, will I have to pay federal, Maryland, and Florida taxes on the capital gains?

Florida has no personal income tax 

Partial Real Estate Inheritance but with a Life Estate

You are selling your remainder interest and realizing a gain.  So it's taxable. The fact that the sale is not necessarily voluntary on your part doesn't mean you don't owe taxes.  (If if you had realized your inheritance in 2016, and paid no tax, you presumably would have invested or spent the money in the intervening 6 years and that would have led to a different kind of taxes being paid.)

 

The gain on your remainder interest depends on the fair market value of the property when your mother died.  You can use any valuation you like, the question is, will it hold up if audited?  Remember that in an audit, you are automatically wrong and the IRS is automatically right unless you can prove otherwise.  A written valuation from a professional with local expertise would be better than a web site, and a professional appraisal would be better than an estimate.  An appraiser can write a retroactive appraisal based on historical records.  

 

You owe federal capital gains tax on your gain.  You report and pay tax on all your world-wide income to your state of residence.  Most states don't have special capital gains rates so the gain will be taxed as ordinary income.  Most of the time, you also owe tax to the state where the property is located on a non-resident state income tax return (your home state gives you an offsetting credit for taxes paid in another state).  But Florida has no personal income tax, so you will only pay tax in Maryland.

 

Note that with a gain of nearly $100K, you will likely be required to make estimated payments to the IRS and your state.  Depending on your income, 15% or 20% to the IRS and 6% to Maryland.  If the house closes in August, the estimated payment is due Sept 15, and if the closing is in September or later, the estimated payment is due January 15.  If an estimated payment is required and you don't make it, you can be assessed an underpayment penalty even if you pay in full when you file your tax return. 

 

 

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