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Adjusted cost basis for an inherited primary residence with a lien

Forum|Forum|2 years ago
November 29, 2023
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Hi all,

My father owned his primary residence in joint tenancy with me. About a decade ago, he applied for a state program that helps seniors postpone their property taxes, whereby the state places a lien on the property and pays the property taxes to the county government. To be clear, this is not a property tax lien imposed for delinquency on property taxes. Rather, this is a senior assistance program (with certain required qualifications and an application process) that they do not specifically call a loan.

He recently passed, and his 50% ownership transferred to me via the joint tenancy. I'm interested in selling the house.

Would the outstanding balance increase the home's adjusted cost basis?
Does it matter that the postponement was in his name and that I inherited the property with this encumbrance?

Thank you all

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Best answer by Anonymous_

Hi all,

Thank you for the responses. My question is focused specifically on the adjusted cost basis of the home; I don't have questions about the personal deductions for taxes paid, etc.

It sounds like the state assistance program is commensurate to a tax lien such that the balance may be considered back taxes. If so, it sounds like there's no basis adjustment. Moreover, I believe the step-up in basis only steps up half of the property since it was held in joint tenancy with me.

Thank you

@kwispy wrote:
It sounds like the state assistance program is commensurate to a tax lien such that the balance may be considered back taxes. If so, it sounds like there's no basis adjustment.

If that is the case, then the taxes would be deductible in the tax year in which you pay (or paid) them and there would be no basis adjustment.

@kwispy wrote:
....I believe the step-up in basis only steps up half of the property since it was held in joint tenancy with me.

Correct; the one-half you acquired from your father is stepped up to its fair market value.

A

Anonymous_

Employee

You should seek guidance from a tax professional in your state as state law may be applied differently.

However, if the lien is in the nature of a loan, then that would not factor into the adjusted basis (half of which would be stepped up to fair market value on the date of your father's passing).

I am sorry for your loss.

K

kwispyAuthor

Thank you for your response. Rereading their website, it looks like they specifically do not call it a loan. It is considered an assistance program requiring specific applicant qualifications that is merely secured by a lien. I'm wondering if this may be considered something else.

Critter-3

Would the outstanding balance increase the home's adjusted cost basis? NO... you get a step up in basis.
Does it matter that the postponement was in his name and that I inherited the property with this encumbrance? No it doesn't make a difference.

O

Opus 17

Employee

One further note. I assume that the back due property taxes will be deducted from the sales proceeds. This is not a deductible expense to you, nor does it reduce the sales proceeds, allowing you to claim a smaller capital gain or a capital loss. You would be allowed to deduct on your tax return, only the property taxes that apply to the period of time when you owned the home, between your father’s death and the sale of the house.

You received a stepped up basis when your father passed, your adjusted cost basis in the home is the fair market value of the home on the date he died. You may want to secure a real estate appraisal to prove this in case of audit. When you sell the home, you can deduct certain selling expenses, (such as real estate transfer taxes and the commission) from the proceeds, but you can’t deduct these past due taxes. Assuming the real estate market doesn’t change two months too much in the short time between your father‘s passing and selling the house, you will likely sell the house very close to its fair market value, so that once you subtract the sales commission, you might even have a slight loss. If you treat this as a personal home, the loss is not deductible, but if you treat it as investment property, the loss is tax deductible.

A

Anonymous_

Employee

Per Section 164, real estate taxes are deductible in the tax year in which they are paid.

https://www.law.cornell.edu/uscode/text/26/164

O

Opus 17

Employee

@Anonymous_ wrote:

Per Section 164, real estate taxes are deductible in the tax year in which they are paid.

https://www.law.cornell.edu/uscode/text/26/164

It is my understanding that real property taxes are only deductible when paid by the person against whom they are assessed. In this case, the taxes were assessed against the father. If the father had sold the property, the father certainly could have deducted them when paid. But the child can't deduct taxes that were assessed to the father and apportioned to the time when the father owned the home.

My justification for this argument is in general, the rules for allocating the property taxes when property is sold (see publication 523 page 17. https://www.irs.gov/pub/irs-pdf/p523.pdf)

And more specifically, 26 CFR § 1.164-1 and § 1.164-6

https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRc4930337f38ecfd/section-1.164-6

Specifically paragraph § 1.164-1(a)

"In general, taxes are deductible only by the person upon whom they are imposed. "

and paragraph 1.164-6(d)(3)

"Persons considered liable for tax. Where the tax is not a liability of any person, the person who holds the property at the time the tax becomes a lien on the property shall be considered liable for the tax."