Appraisal request reinforces need for proper estate planning

This column first appeared in the San Antonio Express-News and its MySA.com site on March 17, 2015.

Dear Mr. Premack: My husband passed away in mid-2014, leaving me as his sole heir. I sold a farm that was partly his inheritance and partly acreage we bought together. The sale closed six months and five days after his death. My accountant says I must have an appraisal to satisfy IRS as to gain or loss on the property all because of those five days, that an appraisal would not have been required if we had closed within 6 months of his death. The mineral rights were included in the sale price of the property, so I cannot see any need for a separate appraisal. Is there any way I can avoid getting an appraisal? – E.W.

First, in order for you to have sold this property you had to have legal authority. You must have either filed his Will for probate and have become Executor of his estate, or operated as Trustee under a Living Trust (where the property was conveyed into a Living Trust before he died, which would have authorized you to sell the land without the need for probate).

When the property was sold, you tax accountant was correctly concerned about properly calculating the capital gain to which you will be exposed. When someone dies, their property receives what is called a “free step-up in basis. This property got a free step-up in basis on both the portion that your husband inherited (his separate property) and on the part you purchased together (community property).

The property basis is adjusted to match the property’s fair market value on the date of death. Any portion of the sales price that exceeds that new basis is subject to capital gain tax. Theoretically, the sale itself is the best measure of the property’s fair market value. But when the sale occurs many months after the date of death, conditions may have changed since the date of death. Hence, your accountant wants a solid appraisal on which he can base the claims you make on your tax return.

There is no hard and fast rule as to the timing involved, but your accountant is using a valid rule of thumb. If the sale had occurred within 6 months of the date of death, the assumption is that the market will not have changed in that 6 months, meaning that the sale price is equal to the fair market value on the date of death. When those two numbers are the same, there is no capital gain tax payable on the sale.

Your sale closed 6 months and 5 days after the date of death. It does seem that market conditions could not have changed dramatically during those 5 extra days. Nonetheless, your accountant is trying to protect you from any future audit by the IRS. He wants you to have solid evidence of the fair market value, and worries that since 6 months and 5 days passed, the IRS won’t be willing to accept the sales price as being equal to the date of death value.

Your accountant is being conservative and correct in his approach. You, on the other hand, seem more willing to gamble that the IRS won’t ask for documentation to substantiate your tax return. If you do not want to pay extra for a new formal appraisal, you could use the county tax assessor’s appraisal. However, that appraisal tends to be low, and it may immediately expose you to unwanted capital gain taxes. The best way to avoid the tax is to follow your accountant’s advice to obtain an independent appraisal.

The mineral rights were sold right along with the land in one deal. Why would the accountant want a separate appraisal? Because the IRS can legally treat the mineral rights as having a value of their own on the date of your husband’s death. Again, the amount of tax you may owe may increase if there is not a solid appraisal on which to base the tax return.

Your situation reinforces the importance of doing proper estate planning. If your husband had never made a Will or Trust, you might have spent many more months in court to gain legal authority to sell the property. Such delays can have negative impacts, like increased accounting fees, appraisal fees and maybe higher capital gain taxes. Readers should take this as a warning to be sure their own estate plans are up to date.

Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues. View past legal columns or submit free questions on legal issues via www.TexasEstateandProbate.com or www.Premack.com.

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