[quote=UCGal]I had to figure out what you guys were talking about with the step-up basis.
(I’m an engineer, not an investor… and I don’t sell houses a lot so I don’t think about capital gains on a daily basis.)
I’m trying to figure out what you guys are suggesting.
– If a person inherits a house (free and clear) the cost basis is that of the time of inheritance. This is done for establishing whether estate taxes need to be paid. In fact this can happen several times on a home if the estate is large – estate taxes may kick in on half the house if half the estate is above the threshold when the first spouse dies and they don’t have a trust.
– In my case I paid full market for the house. My dad was still alive. I’m not an only child. The proceeds were his and eventually I got some back as my portion of his estate. But he could have gone to Vegas and bet it all on Red. Prop 58 does not address the form of transfer – sale, inheritance, gift. All are allowed in a prop 58 transfer. Prop 58 does not address estate taxes. The feds and CA still require estate taxes if the value of the estate (including the market value of a home if there is one) are above a threshold.
I guess I’m not too worried about capital gains when I sell, since I plan on living here till I die… But to suggest that the cost basis should be different than what I paid (full market value), I don’t get it.
Or am I misinterpreting what you guys mean about the step up cost basis. Speak slowly when you explain… I’m not an accountant or investor. ;)[/quote]
LOL, UCGal. 🙂 You can run circles around me where numbers are concerned, to be sure.
Here’s what I was talking about:
When a parent dies and leaves a house to an heir, the heir can “step-up” the cost basis of the house to the current market price. So, if my mom bought a house for $50K in 1970, and she dies in 2005, with the bubble price being $700K, as an heir, I can “step up” the cost basis to $700K and when I sell it for $700K, I pay no capital gains taxes on it. The capital gains are $0.
If I sell it in 2030 for $1MM, the cost basis (or$700K) at mom’s time of death in 2005 remains the cost basis at the time of sale in 2030, and I only owe cap gains taxes on $300K ($1MM proceeds minus $700K cost basis).
Without this stepped up cost basis, if I sold at the time of her death in 2005, I would have to pay capital gains taxes on $650K ($700K proceeds minus $50K cost basis from 1970), rather than pay taxes on zero. If I sold in 2030 at $1MM, we’d be taxed on $950K ($1MM minus $50K), instead of $300K ($1MM minus $700K “stepped-up” basis at time of death).
This is about capital gains, separate from estate taxes.
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I’m agreeing with BG because, as it stands, the heirs get the original cost basis for Prop 13 (so they pay much lower property taxes), and they also get to step up the cost basis for cap gains tax purposes (and paying lower CG taxes as a result). It’s like they step up or down the cost basis, and benefit in both directions. This should not be allowed.
I understand the taxes go to different entities (prop vs. income), but my point is heirs should pay taxes, one way or another, unless they sell immediately, rendering property taxes a moot issue. But they should not be allowed to hang on to the property forever while paying lower prop taxes, but then ALSO be allowed to have the stepped up basis when it comes to selling.
