Estate Planning and Probate/Probate Valuation / California

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Question
REF: Monterey County, California / Non-Trust

Greetings Ms. Brewer,

Until my brother's passing in April 2013, I owned 50% share of a house as 'Tenants in Common' with him. This house was inherited from our parents in 2002. At the time of the 2002 inheritance, the cost basis was established to be at $500K. Since that time, improvements were made to the tune of about $60K. Since about 2005, we have rented-out the house. In 2008, our accountant re-established the tax basis on the house as being $1,300K for depreciation purposes and that is the figure used for California tax purposes. Now, my brother willed his 50% share to me. I understand that this real property must undergo a FMV appraisal. My question is this: Is the FMV on the property taken, that of  the whole property? Is it only his 50% share that becomes impacted by any cost basis re-adjustment, if any?  Do I save my 50% cost basis? Thanks for any information you can provide, I hope I have been clear.
GB

Answer
Thank you for your question and please accept my condolences on your brother's death.

The appraisal you need depends upon what it will be used for (but see the very end of this email, too):

1.  If your brother's entire estate was worth more than $5,250,000 (including prior gifts he may have made), then the appraisal will be used as part of an estate tax return

2.  If your brother's estate (including prior gifts) was worth less than $5.25MM, then the appraisal will be used for a few "competing" purposes:

a.  To reset the depreciation on the 50% you inherited from him (the higher the appraised value, the more depreciation you will be able to claim) and

b.  To determine the value for property taxes - your property tax bill is going to increase as a result of the inheritance; the portion that you inherited from your brother does not qualify for an "exclusion" from property tax increases (when your parents passed away, the property presumably qualified for the "parent-child" exclusion).

c.  The appraised value of your brother's portion will affect the amount of capital gains tax that will need to be paid if/when the property is sold in the future.

And yes, only your brother's 50% becomes impacted by any "cost basis" readjustment; the cost basis on your 50% is still based on the value of the property as of the date of your parents' death plus the value of any capital improvements since that date.

I am very confused by what you say the accountant did with the cost basis - if the cost basis was $500,000 when you inherited it and there were $60,000 of improvements made, I don't see any way that the accountant could use a $1,300,000 figure as the basis for depreciation.  Either the $500,000 cost basis established in 2002 was incorrect OR you need a new accountant.

By the way, you don't mention whether you are a US citizen, green card holder, or "non-resident alien".  If you are a non-resident alien, your US estate will be taxed on any value over $60,000.  So if you're an NRA who owns US real estate worth $1.3MM, your heirs will pay about $350,000 US in estate taxes.  There are (quite legal) ways to decrease this if you are willing to do some estate planning.

In addition, you indicate that you and your brother owned the house as "tenants in common".  Therefore, the only way to have it transferred into your name (if your brother did not have a "living trust") is to go through the probate court.  If the property needs to go through a probate court transfer, a "probate referee" will be appointed by the Court to appraise the value of the property - you will have to pay for the Court appraisal even if you have paid for your own "private" appraisal (so you might as well let the probate referee do the appraisal unless there are "extenuating circumstances").

I would be delighted to assist you if you need to probate your brother's share of the estate.  Just let me know by filling out the "getting started" form on my website (www dot calprobate dot com).

Regards,
Janet

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Janet Brewer Law Offices

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BE CAREFUL about taking legal advice from non-lawyers.

I am a licensed attorney in California. I am available to answer questions about probating estates, preparing wills and trusts, administering estates and trusts, forming family limited partnerships and limited liability companies, and establishing a wide variety of estate and gift tax-sensitive trusts (charitable trusts, children's trusts, irrevocable life insurance trusts, etc.).

I can also answer questions regarding the preparation of estate tax returns (Form 706) in taxable estates. Please note that I do not prepare trust income tax returns and cannot provide you with any information about that type of return.

Please note: I am only able to practice law in the State of California. I cannot answer specific questions about other states' laws; I can only provide some "general" information that may or may not apply to your situation.

Experience

I have practiced California estate, gift-planning, and probate law exclusively since 1991. I am certified as a specialist in estate planning and probate law by the California State Bar Board of Legal Specialization (there are less than 125 such specialists practicing in Santa Clara County and fewer than 7,000 practicing in California - out of over 170,000 lawyers statewide). I have served as an Instructor in the CFP (certificate in financial planning) program at University of California Santa Cruz, teaching the estate planning segment.

Organizations
Silicon Valley Bar Association
Wealth Counsel
Wealth Advisors' Forum
Executive Committee Member, Solo and Small Firm Section of the California State Bar (appointed to a 3 year term by the California State Bar Board of Governors)

Education/Credentials
I received my law degree (J.D.) from University of Denver Law School in 1975. I was admitted to the Colorado Bar in 1975 and to the California Bar in 1977 (NOTE: although I am a member of the Colorado Bar, I am on INACTIVE status there). I earned an M.B.A. in 1982, and I earned a Masters Degree in Taxation Law (LLM) at Golden Gate University Law School in 2010 (with honors).

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Awards and Honors
2007, 2008, 2009, 2010, 2011, & 2012 - chosen as a "SuperLawyer" - one of the top 5% of Northern California lawyers practicing in the estate planning and probate area (www.superlawyers.com). Avvo Rating of 10.0/10.0

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