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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]
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

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.)

NextHome launches full-service insurance offering through premier partner Gateway Insurance Group, Inc.

NextHome launches full-service insurance offering through premier partner Gateway Insurance Group, Inc.

Pleasanton, CA — January 8, 2019 — NextHome, the progressive real estate franchise with consumer-focused branding, technology and marketing, announces its exclusive partnership with Gateway Insurance Group, Inc., a contemporary insurance agency that advocates for practicality and protection, set on providing buyers and sellers with excellent service across all of their insurance needs.

Through this strategic partnership with Gateway Insurance Group, Inc., NextHome franchise members will be able to offer their clients a diverse portfolio of world-class insurance products. Same as NextHome, Gateway Insurance Group, Inc. is committed to providing an exceptional experience from beginning to end, crafting the ideal coverage package based on the person’s individual needs.

“We are thrilled to be connected with the network of professionals at NextHome,” said Shane Westhoelter, founder and CEO of Gateway Financial Advisors, Inc. and Gateway Insurance Group, Inc. “As a business owner myself, I know the value of personalized service, customized advice, and people who take pride in what they provide. Gateway Insurance Group, Inc. is excited to be the one-stop insurance partner for NextHome.”

“All of us at NextHome are looking forward to launching this new venture with Gateway Financial,” added Imran Poladi, Vice President of NextHome. “I have personally known Shane for some time now and the business he and his team have built is simply fantastic. We are extremely excited and ready to roll out this business relationship to all of our NextHome members throughout the nation.”

The seamless partnership is geared toward real estate professionals, allowing them to offer their buyers and sellers more practical solutions out of one place. The agents will be able to provide clients with convenience and custom insurance strategies that go beyond the monotonous simplicity of policy buying. With Gateway Insurance Group, Inc. as the premier provider of home and auto insurance, clients working with a NextHome agent will have peace-of-mind in knowing they have a tailored plan that suits their current situation and budget.

“The level of service Gateway Insurance Group, Inc. provides their clients sets the standard in their industry,” said James Dwiggins, CEO of NextHome. “Their personalized approach to insurance will allow NextHome agents and brokers to deliver great value to their buyers and sellers long after the transaction has ended.”

“We pride ourselves on our history of excellent service,” added Aprilyn Chavez-Geissler, First Executive Vice President of Gateway Insurance Group, Inc. “Gateway customers have entrusted us with their home, auto, and life insurance and we are thankful for the opportunity to help them take the ‘IF’ out of life. We are excited to bring our insurance and financial planning expertise to the NextHome network.”

Once the client has established a relationship with Gateway Insurance Group, Inc. they may wish to engage Gateway Financial Advisors, Inc. as a wealth management and financial planning partner. “We find that many clients who entrust their insurance solutions to Gateway Insurance Group, Inc. make the natural transition to continuing the conversation around finances and Quality Life Planning™ with Gateway Financial Advisors, Inc.,” added Westhoelter.

To commemorate the new partnership, Gateway Insurance Group, Inc. will be a Diamond Sponsor at the 2019 NextHome Conference in Las Vegas.

For additional information about this new offering, visit: https://www.gfapandc.com/nexthome.

 

About NextHome, Inc.

NextHome, Inc. is an independently owned national franchisor with a focus on changing the way consumers work with local agents and shop for real estate online. It owns the NextHome and Realty World Northern California & Northern Nevada franchise networks with over 440 offices and more than 3,400 agents. The company closes over 17,000 transactions annually worth over $5B in volume. For additional information, visit www.nexthome.com.

 

About Gateway Insurance Group, Inc.

Since 1990, Gateway Insurance Group, Inc. has established itself as a leader in the insurance industry. Currently, Gateway Companies provides insurance and financial services to over 75,000 households. For additional information, call 858.428.3929 or email nexthomequotes@gatewayig.com.

 

Securities offered through Registered Representatives of Cambridge
Investment Research, Inc., a Broker/Dealer, and 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.