Blog :

Explaining the Basis of Inherited Real Estate

Explaining the Basis of Inherited Real Estate

At some point in our lives, we may inherit a home or another form of real property. In such instances, we need to understand some of the jargon involving inherited real estate. What does “cost basis” mean? What is a “step-up?” What is the home sale tax exclusion, and what kind of tax break does it offer?

Very few parents discuss these matters with their children before they pass away. Some prior knowledge of these terms may make things less confusing at a highly stressful time.

Cost basis is fairly easy to explain. It is the original purchase price of real estate plus certain expenses and fees incurred by the buyer, many of them detailed at closing. The purchase price is always the starting point for determining the cost basis; that is true whether the purchase is financed or all-cash. Title insurance costs, settlement fees, and property taxes owed by the seller that the buyer ends up paying can all become part of the cost basis.1

At the buyer’s death, the cost basis of the property is “stepped up” to its current fair market value. This step-up can cut into the profits of inheritors should they elect to sell. On the other hand, it can also reduce any income tax liability stemming from the transaction.2

Here is an illustration of a stepped-up basis. Twenty years ago, Jane Smyth bought a home for $255,000. At purchase, the cost basis of the property was $260,000. Jane dies and her daughter Blair inherits the home. Its present fair market value is $459,000. That is Blair’s stepped-up basis. So if Blair sells the home and gets $470,000 for it, her complete taxable profit on the sale will be $11,000, not $210,000. If she sells the home for less than $459,000, she will take a loss; the loss will not be tax-deductible, as you cannot deduct a loss resulting from the sale of a personal residence.1

The step-up can reflect more than just simple property appreciation through the years. In fact, many factors can adjust it over time, including negative ones. Basis can be adjusted upward by the costs of home improvements and home additions (and even related tax credits received by the homeowner), rebuilding costs following a disaster, legal fees linked to property ownership, and expenses of linking utility lines to a home. Basis can be adjusted downward by property and casualty insurance payouts, allowable depreciation that comes from renting out part of a home or using part of a residence as a place of business, and any other developments that amount to a return of cost for the property owner.1

The Internal Revenue Code states that a step-up applies for real property “acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent.” In plain English, that means the new owner of the property is eligible for the step-up whether the deceased property owner had a will or not.2

In a community property state, receipt of the step-up becomes a bit more complicated. If a married couple buys real estate in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, or Wisconsin, each spouse is automatically considered to have a 50% ownership interest in said real property. (Alaska offers spouses the option of a community property agreement.) If a child or other party inherits that 50% ownership interest, that inheritor is usually entitled to a step-up. If at least half of the real estate in question is included in the decedent’s gross estate, the surviving spouse is also eligible for a step-up on his or her 50% ownership interest. Alternately, the person inheriting the ownership interest may choose to value the property six months after the date of the previous owner’s death (or the date of disposition of the property, if disposition occurred first).2,3

In recent years, there has been talk in Washington of curtailing the step-up. So far, such notions have not advanced toward legislation.4

What if a parent gifts real property to a child? The parent’s tax basis becomes the child’s tax basis. If the parent has owned that property for decades and the child cannot take advantage of the federal home sale tax exclusion, the capital gains tax could be enormous if the child sells the property.2

Who qualifies for the home sale tax exclusion? If individuals or married couples want to sell an inherited home, they can qualify for this big federal tax break once they have used that home as their primary residence for two years out of the five years preceding the sale. Upon qualifying, a single taxpayer may exclude as much as $250,000 of gain from the sale, with $500,000 being the limit for married homeowners filing jointly. If the home’s cost basis receives a step-up, the gain from the sale may be small, but this is still a nice tax perk to have.5

Shane Westhoelter may be reached at 858-428-3929 or shane@gfainvestments.com

Gateway Insurance Group, Inc.
6000 Uptown Blvd NE Ste 100
Albuquerque, NM 87110

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a brokerdealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Gateway Financial Advisors, Inc., and Cambridge Investment Research, Inc. are not affiliated.
Citations.
1 – nolo.com/legal-encyclopedia/determining-your-homes-tax-basis.html [3/30/16]
2 – realtytimes.com/consumeradvice/sellersadvice1/item/34913-20150513-inherited-property-understanding-the-stepped-up-basis [5/13/15]
3 – irs.gov/irm/part25/irm_25-018-001.html
4 – blogs.wsj.com/totalreturn/2015/01/20/the-value-of-the-step-up-on-inherited-assets/ [1/20/15]
5 – nolo.com/legal-encyclopedia/if-you-inherit-home-do-you-qualify-the-home-sale-tax-exclusion.html [3/31/16]
Living in the Future: Smart Home Technology

Living in the Future: Smart Home Technology

Remember the beloved cartoon, “The Jetsons?” Robot maids, jet packs, moving sidewalks, and flying cars? In the 1960s, when the cartoon was first released, there seemed to be only frivolous imaginary creations. Fast-forward to 2019 and many of the technology predictions from, “The Jetsons” have actually come true! Talking alarm clocks, flat screen TVs, smartwatches and video chats to name a few!

These tech gadgets don’t stop there, they’ve recently made their way into real estate via “Smart Home Technology.”

What is Smart Home Technology?

  • Technology with sensors or devices that can be remotely monitored, controlled and accessed via smartphones, tablets, or apps

What are the most popular applications of Smart Home Technology?

  • Wireless Speakers
  • Thermostats
  • Home Security Systems
  • Cleaning Devices (robot vacuums)
  • Smoke Detectors
  • Lighting
  • Door Locks
  • Refrigerators
  • Water Monitors
  • Laundry Machines

What limitations exist?

  • Adaptation can be costly and time-consuming. Buying the adaptors, setting up the networks, learning the controls and having the proper maintenance/updates can be troublesome and expensive.
  • The networks these gadgets rely upon can be prone to security breaches! Be wary of your personal data and monitor your credit and personal information regularly. (Gateway has a very inexpensive Identity Protection product for just $10/month!)

What consumers want and use:

A 2012 consumer report that pulled data from the National Association of Home Builders looked for what Smart home devices homeowners wanted most and found that top five were wireless security systems (50%), programmable thermostats (47%), security cameras (40%), lighting control systems and wireless home audio systems (39%), and home theater and multi-zone HVAC systems (37%).1

A 2015 study from “The Harris Poll” shows:

While the information provided in the studies published above from 2012 and 2015, the desires of Home Owners have not seemed to vary since then. A few of Amazon’s most purchased products include their “Amazon Echo Dot” a smart home speaker/wireless voice control, “Amazon Fire Stick” smart home streaming device, “Amazon Fire Tablet” that can control the smart home apps/functions, the “iRobot” vacuum, “WeMo mini smart plugs” that turn regular outlets into Smart Home hubs, “YI Dome Camera” for security footage, and more!3

What do you use in your house? We’d love to hear from you!

To learn more about our partners at Gateway Insurance Group, Inc. visit their website.

References:

1- “What Homeowners Want”. Home Tech Integration. Retrieved 1 April 2018.
Chart- McCarthy, Niall. “How Prevalent Is Smart Technology In U.S. Homes?”. Forbes. Retrieved 1 April 2018.
3- https://www.bestproducts.com/lifestyle/g3486/best-selling-products-on-amazon/?slide=1
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a brokerdealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Gateway Financial Advisors, Inc., and Cambridge Investment Research, Inc. are not affiliated.
Understanding Homeowners Insurance: What all new and prospective homeowners need to know

Understanding Homeowners Insurance: What all new and prospective homeowners need to know

If you arrange a mortgage, your lender will want you to have homeowners insurance. This coverage is critical for protecting your home and personal property against various potential liabilities.

A homeowners insurance policy is actually a package of coverages. These policies commonly offer the following forms of protection:

*Dwelling coverage insures your house and any attached structures, including fixtures such as plumbing and electrical and HVAC systems, against damages.1

*Other Structures coverage is included to compensate you for damage to structures unattached to the main dwelling on your property, such as a detached garage, tool shed, or fence.1

*Personal Property coverage addresses damage to your personal possessions, such as your appliances, furniture, electronics, and clothes.1

*Loss of Use coverage reimburses you for additional living expenses if you are unable to live in your home due to damages suffered.1

*Personal Liability coverage is designed to pay out claims if you are found liable for injuries or damages to another party. As an example, say someone attends a barbeque held in your backyard, then stumbles over a tree root and breaks a wrist or an ankle.1

*Medical Payments coverage pays the medical bills incurred by people who are hurt on your property, or hurt by your pets. This is no-fault coverage. If someone is hurt at your house, any resulting medical bills may be sent by that person to your insurer.1

These coverages pertain only to losses caused by a peril covered by your policy. For instance, if your policy doesn’t cover earthquake damage, then losses will not be reimbursed.1

The types of covered perils will depend on the type of policy you buy. Special Form policies are the most popular, since they insure against all perils, except those specifically named in the policy. Common exclusions include earthquakes and floods. Typically, flood insurance is obtained through the National Flood Insurance Program, while earthquake coverage may be obtained through an endorsement or a separate policy. Some homeowners are reluctant to buy flood or earthquake coverage; they think it is too expensive and may never be needed. The thing is, the future cannot always be guessed by looking at the past.2

Your policy will of course limit the amount of covered losses. If you have a valuable art collection or jewelry, you may want to secure additional insurance on those items.

When you scrutinize a policy, see if it insures your residence for replacement cost or actual cash value. Actual cash value is less preferable: it may not cover all your losses, as the value of your personal property can be affected by wear and tear, and your home’s value can be affected by housing market fluctuations. If your home is insured for replacement cost, then the insurance carrier will pay the expenses of using materials of similar kind and quality to rebuild or repair your home.3

As a last note, you may also want Umbrella Liability coverage. Do you consider yourself wealthy? You may find the liability limits on your current homeowners policy inadequate. For a greater degree of coverage, you might elect to complement it with an umbrella policy.4

Shane Westhoelter may be reached at 858-428-3929 or shane@gfainvestments.com
www.gatewayig.com/nexthome

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a brokerdealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Gateway Financial Advisors, Inc., and Cambridge Investment Research, Inc. are not affiliated.

Citations.
1 – https://www.iii.org/article/what-covered-standard-homeowners-policy [12/3/18]
2 – https://www.valuepenguin.com/types-homeowners-insurance [9/25/18]
3 – https://www.thebalance.com/replacement-cost-insurance-vs-actual-cash-value-4154015 [11/18/18]
4 – https://www.kiplinger.com/article/insurance/T028-C000-S002-why-you-need-an-umbrella-insurance-policy.html [9/25/18]

You Control the Outcome: Downsizing in Retirement

You Control the Outcome: Downsizing in Retirement

Congratulations – you’ve reached a point in your life where the heavy lifting of child rearing, career chasing, ladder climbing, and “accumulation phase” have peaked and you’re ready to steadily slide into your glorious, golden years of retirement. Naturally, many people think that retiring and downsizing must be synonymous. Sure, there are many benefits of downsizing in retirement, but there are also some common pitfalls to be aware of. We’ve compiled a list of do’s and don’ts so you can successfully navigate downsizing in retirement.

Do:

1. Focus on your “must haves.” Set your non-negotiables whether that is wanting to be near a golf course or grandkids, having an attached garage or gourmet kitchen, handicap accessible doors and hallways, and main-level living, etc. Knowing what you want (and don’t want) will narrow your options down quickly.

2. Have a budget. Talk with your financial advisor about your plans. Map out your monthly budget and be sure to make considerations for HOA fees, rising healthcare costs, leisure activities, transportation costs, insurance, and other important budgetary line items that can affect your overall spending in retirement.

3. Try it before you “buy it.” You don’t have to make a final decision immediately. There are many alternatives to simply selling and moving because you feel like you have to.

  • Find a rental comparable to what you ultimately see yourself owning.
  • Secure a “long-term” Airbnb or VRBO to test drive your downsizing plans.
  • Rent a storage unit for the excess furniture and possessions you are considering eliminating. If you can live without them for 4-6 weeks, chances are you are ready to part with them permanently.

Don’t:

1.Set unrealistic expectations. Just because you find a smaller space doesn’t mean it will save you money. Similarly, don’t expect the sale of your property to generate unrealistic profits. Find a trusted realtor to help you understand the process start to finish.

2. Do it alone. Cleaning, decluttering, organizing, packing, and unpacking are strenuous jobs. It can also be emotionally trying leaving a home you’ve created lasting memories in, and parting with sentimental items you’ve accumulated. Seek help. Whether it is hiring a professional packing and moving company, or recruiting your friends and family, secure a support system before you begin the journey of downsizing.

3. Wait until it is too late. Timing is everything. Waiting until you’re forced to leave your home could have severe consequences on your emotional and financial well-being. With the proper advanced planning, you stay in control of your satisfaction and happiness rather than leaving it to chance.

Are you ready to start planning your downsizing efforts? Gateway Insurance Group would be glad to partner with you. Give us a call at 858-428-3929 or visit us at www.gatewayig.com/nexthome

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Gateway Financial Advisors, Inc., and Cambridge Investment Research, Inc. are not affiliated.

Spring Cleaning Life Hacks

Spring Cleaning Life Hacks

Spring has sprung! As you’re enjoying your morning coffee with the windows open, the sunlight hits just perfectly and you notice glittering speckles of dust floating through the air. You look around and the baseboards have dust bunnies and the blinds and ceiling fans have a visible layer of filth. No one wants to buy a dirty house – time for some SPRING CLEANING! You’re in luck – we’ve got a few Life Hacks to make the most common cleaning conundrums a bit more bearable. Your prospective buyers will appreciate the cleanliness and comfort these hacks bring!

Life Hack #1 – Use lemons to remove stains from faucets and other hardware so prospective buyers don’t inherit grimy fixtures.

Life Hack #2 – Use two common kitchen sponges – cut a slit in the middle section and attach them to kitchen tongs. Use these to clean dust from vertical/horizontal blinds and ceiling fans so prospective buyers aren’t fixated on dirty housewares.

Life Hack #3 – Scrub baseboards with a magic eraser sponge and then wipe down with a dryer sheet to repel future dust/hair from clinging to them. Make those important details and accents spick and span.

Life Hack #4 – Eliminate greasy and grimy cabinets by scrubbing with a toothbrush coated with vegetable or coconut oil and baking soda. Your potential buyers will love the freshly shined finishes.

Life Hack #5 – Fill a plastic bag with white vinegar and secure it over your shower head with a twist tie. Eliminate those unsightly hard water stains to make your bathroom look like new again.

Life Hack #6 – Oil and grease stains on your concrete and garage floors are an eyesore. Use some coca-cola to soak them and remove the presence of stains so your buyers see this property has been well cared for.

Life Hack #7 – Coffee filters are the perfect dusting tool for televisions, monitors, and other screens. Your screens will be so clean the prospective buyers will be able to see their smiling reflection as they take in the beauty and charm of your home.

Life Hack #8 – Streak free windows enhance your home’s appeal. Use some crumpled newspaper and window spray (or make your own using 2 cups water, ¼ cup vinegar, ½ teaspoon liquid soap) for a streak-free shine.

Be sure to reach out to Gateway Insurance Group to learn more about simple tips that can make all the difference for the value of your home. Visit us at www.gfapandc.com/nexthome

Don’t Be That Neighbor… Tips to Increase the Value of your Home

Don’t Be That Neighbor… Tips to Increase the Value of your Home


Tip 1: Let the experts help

 

Invite a NextHome realtor or interior designer over to give your home an initial assessment. You’ll avoid wasting time or money on less significant renovations and you’ll walk away with new inspiration. Remember: not every home improvement is cosmetic. Deteriorating roofs, termite infestation or outdated electrical systems severely affect the value (not to mention SAFETY!) of your home. Hire an inspector and make a checklist of urgent, important, and someday renovations

 

Tip 2: Landscaping Matters

 

Curb appeal is basically a love language in itself. Get rid of trash, clutter, and any other eyesores that might detract from a first impression. Purchase plants that are native to your region or plants that are drought-tolerant; these require less water and maintenance, which means cost savings for you.

 

Tip 3: Paint, Paint, Paint

 

One of the simplest and most cost-effective improvements of all is paint. When selecting paint colors, keep in mind that neutrals appeal to the greatest number of people.

 

Tip 4: Owning Less is Better than Organizing More

 

Your home tells a story and a clutter-free, bright space is always going to attract more potential buyers. It can be a worthy investment to hire a professional cleaning service to deep clean your home.

In addition to cleanliness, visual space or how large your home feels also matters. Replace heavy closed draperies with vertical blinds or shutters to let light in or try adding a single large mirror to a room to visually double the space.

 

Tip 5: Big Return on Bathroom & Kitchen Updates

 

A great room to update for less than $750 is the bathroom. The two rooms that benefit most from even small renovations are the kitchen and bathroom. One cost-effective change — like replacing an outdated vanity, old plumbing, and lighting fixtures or adding a new tile floor — will guarantee a lot of bang for your buck and give your bath an updated, modern look.

You don’t have to start from scratch to increase value in the kitchen. Start by swapping out just one item, such as a stained sink or ancient microwave for shiny new stainless models. Even small kitchen updates will add big value to your home.

Be sure to reach out to Gateway Insurance Group to learn more about simple tips that can make all the difference for the value of your home. Visit us at www.gfapandc.com/nexthome

The dirty “D” word of insurance – Deductible

The dirty “D” word of insurance – Deductible

In the business of insurance, customers and clients have identified two dirty words, premium, and deductible, because they imply a cost the customer will have to pay. Premium refers to the monthly, semi-annual, or annual bill a customer pays for insurance protection. A deductible is the financial portion of a claim an insured (aka homeowner) would be responsible for in the event a claim is made.

When it comes to homeowner’s insurance, a deductible can actually be structured one of two ways: it can be a flat rate (for example a $1000 deductible) or it can be a percentage of the insured structure (for example a 1% deductible on a $250,000 home would be $2500.)

Generally, the higher deductible a customer can afford, the more inexpensive the regular premiums will be. With a higher deductible, the customer is taking on more personal risk in the event of a claim, so the insurance companies reward them with a lower bill.

 

PRO TIP for homeowners: set up a separate savings or investment account that always keeps your deductible set aside so you can use it as needed during the time of a claim.

Also, be aware that a homeowner’s insurance deductible does not operate in the same fashion as a health insurance deductible. Each homeowner insurance claim requires the same expected deductible* and small claims do not add up until you “meet your deductible” as it does in healthcare. This means that clients should not file a claim unless the damage to the property is substantial enough to surpass their deductible. Your designated insurance agent will be able to help educate you on do’s and don’ts of filing claims.

 

PRO TIP for homeowners: consider bundling your home and auto insurance with the same company to earn discounts on your insurance costs.

Finally, don’t expect to write your insurance company a check for your deductible in the event of a claim. The insurance company will assess the damage and make payment to the insured minus their deductible. For example, a homeowner’s insurance claim adjusted in the amount of $10,000 with a $1,000 deductible would pay the insured $9,000.

When you understand the dirty words of insurance, they become a little less intimidating and you can control how you use them (literally and figuratively.)

Be sure to reach out to Gateway Insurance Group to explore your options for deductibles, discounts, and more! Visit us at www.gfapandc.com/nexthome

*With some policy provision exceptions (like a lesser deductible for a wind claim, etc.)