DEAR BOB: I know you have tackled this issue before, but I still don’t understand. I’m sure many other readers are also interested. What does stepped-up basis mean for a house? My late husband and I owned our home as joint tenants with right of survivorship. He died in 2003. We bought our home in 1978 for about $200,000. Today, it is worth at least $650,000. What is my basis so I can see if I will owe any tax should I decide to sell? – Doris F.
DEAR DORIS: The exact answer depends on the state where the property is located. If it is a non-community-property state, you receive a new stepped-up basis to market value on the 50 percent of the home you received from your late husband, plus your original 50 percent share.
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To illustrate, if the house was worth $650,000 when your husband died, you received a new stepped-up basis on “his half” of the house at $325,000, plus your original $100,000 basis, for a $425,000 total new stepped-up basis.
However, if your home is in a community-property state, you probably received a new stepped-up basis on the entire market value of the home on the date of your husband’s death. That means your new stepped-up basis is close to the $650,000 current market value. For exact details, please consult your tax adviser.
WHAT IS A LAND PATENT?
DEAR BOB: I recently heard it is possible to receive a federal land patent on real estate. How does a person get one? – Boyd P.
DEAR BOYD: A land patent is a real estate “deed” from the U.S. Government to a federal property containing valuable minerals. To illustrate, that is how the California gold miners acquired title to their claims back in the 1850s.
Today, to acquire title to federal land by a land patent, you must discover valuable minerals on that land in quantity. But the land is no longer free.
The federal Mining Act of 1872 requires payment of $2.50 per acre after you prove discovery of valuable minerals. But no mineral royalty payments to the federal government are required.
This old federal law has been used in recent years to acquire title to large tracts of federal land where minerals were discovered by mining companies. But don’t get any wild ideas about staking out a claim to federal land unless you can prove discovery of valuable minerals on your claim.
TAX-DEFERRED EXCHANGE DETAILS REVEALED
DEAR BOB: Please help us understand tax-deferred exchanges in more detail. We want to trade our investment property for a “like kind” investment property. The value of our property is $975,000. After all the sales expenses, our equity will be about $600,000. Do we have to trade at the $975,000 level or the $600,000 level? – Dennis R.
DEAR DENNIS: Here is the simple IRS 1031 tax-deferred exchange rule: To have a tax-deferred trade, you must exchange equal or up in both price and equity.
That simple rule means if you take out any cash from the transaction, called “boot,” by owing less on the mortgage on the property you acquire than you owed on your old property, that boot is taxable capital gain. More details are in my special report, “How to Exchange Your Way to Tax-Deferred Real Estate Wealth,” available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF download at www.bobbruss.com. Your questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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