The cost basis for real estate as defined by the tax law of the United States of America as the original cost of real estate, adjusted for factors such as depreciation; it is the historical cost that you spent on your real estate. Cost basis is a tool used to calculate the profit made when you sell off your property. Cost basis is expressed in terms of a purchase price except for instances where the property is a gift, or it was inherited, as you actually did not purchase the property in both cases. You’re expected to pay taxes on profit on capital gains that equals the amount received from the sale of the property, minus the sold property’s basis, thus, it is better to get a tax preparer or an Accountant to give guidance on how to calculate cost basis for real estate. Cost basis is essential to a Tax preparer because the tax is due based on the gain in your asset value. For example, if an individual acquires a house for $1.3 million, and sells it for the same price, then he’s not obligated to pay tax as there is no profit. However, if he had sold that same house for $1.4 million, then there is a capital gain of $100,000, which is taxable. After paying your tax on the real estate, the price the buyer pays for the real estate will be the cost basis for any future tax.
For Federal income tax, calculating the cost basis is dependent on how you acquired the real estate in question.
When you inherit real estate that you didn’t purchase by yourself, it can be a bit of a challenge to know the amount that should be paid in tax, no need to be agitated; we’ll break it down for you.
To calculate the cost basis of an inherited real estate, you will have to use the value of the Real estate as at the date of the original owner’s demise, or you can use the value of the real estate at a date selected by the executioner. The time chosen by the executioner should not be later than six months after the death of the owner. Let’s explain the modus operandi for each method.
Note the year of death of the decedent. If the year of death was 2019, then the cost basis carries over, as such, you should use the original cost basis of the decedent. This cost basis could be the amount the real estate was purchased by the decedent, or the step-up costs if the property was also inherited by the decedent. The total step-up basis is $1.3 million, or $4.3 million for surviving spouses, thus increasing the cost basis. The increase is applied to everything you inherited from the decedent, and you may choose to use it on everything you inherited or ignore it totally, it all depends on what works best for you. For example, if the cost basis of the decedent was $500,000, but the real estate appreciated to $5 million, as such your cost basis would be an addition of $500,000 and $1.3 million provided that you’re not a surviving spouse. Therefore your cost-basis, provided you choose to use the step-up basis would be $1.8 million.
Contact the will’s executioner and ask him if he’s elected to use a date for the determination of the cost basis. The executioner may choose to select a time that is not more than six months after the decedent’s death. The time of death should be used if he/she did not choose an alternate date.
Calculating the cost basis of a gifted real estate is dependent on whether the basis is being calculated for the purpose of gain or loss.
For gain, the basis in the hands of the donor and the recipient is the same, and this is called a “carryover” basis. For example, if an individual acquires real estate for $500,000 , and he chooses to give it to Mr Maxwell, then Mr Maxwell takes $500,000 as his basis. However, if Mr Maxwell sold the real estate when it reached a value of 1 million, then his tax liability will be based on the gain of $500,000.
When the asset reduces in value, then you have to determine the cost basis for the purpose of loss. You will have to use the fair market value of the asset at the time of gift. For example, if the donor acquired the property for $500,000, and as at the time he gave the gift to Mr Maxwell, it had depreciated in value to $250,000, if Mr Maxwell decides to sell the house for $150,000, then the basis for measuring Mr Maxwell’s loss will be $100,000. However, if the property was $600,000 at the time Mr Maxwell received the gift, and he sold it for $300,000 then the basis for measuring the loss will be $500,000 (because it is lower than the worth of the property as at the date of the gift), as such, the recipient’s loss would be $500,000 less $300,000. I’ll advise that you find a tax preparer or/and an accountant to help you the cost basis of your Real estate.
John Pournaras Agency