Archive for April, 2013|Monthly archive page

Taxes? I’m in Key West!

Originally published in the Cedar Street Times

April 19, 2013

When this paper hits the newsstands, I will hopefully be far from thinking about itemized deductions, dependent exemptions, and the IRS!  This tax season tended to be compressed for many tax professionals due to the last minute changes by Congress which delayed the IRS releasing many common forms until early March of this year.  Of course we tried to get the information from clients and prepare the returns except for the remaining forms, but it still had an effect of creating additional late night hours!  That is now over, however, and it is time to take a breather!  My wife and I and one-year-old son are headed for the southern-most point in the United States – Key West, Florida.

When I was 16 my family took a trip to Key West, Florida.  My father enjoyed taking us around to go Key lime pie tasting and to show us the sites he was familiar with from his younger days.  My grandfather was an architect in Key West for a number of years and both my uncle and my father were “Conchs.”  This term, derived from the shell of the large sea snail, is affectionately given to anyone born in Key West.

My dad’s aunt, Peggy Mills, also lived on the island.  She was a collector of orchids from all over the world and received special permission to import unusual orchid varieties into her growing gardens.  Over the years she tore down over a dozen buildings in the heart of Key West to make room for her gardens and then made them open to the public.  She also imported special bricks and four “tinajones” from Cuba.  The tinajones are basically large clay pots weighing about 2,000 pounds each and were used for rainwater collection by Spanish settlers   They are the only ones in the United States.  She was friends with President Batista of Cuba at the time, which was her connection to obtain these artifacts.  When she passed away in 1979, my grandfather sold the property with the pledge from the new owners that the gardens would remain.  Although the property has changed hands several times, you can now stay at The Gardens Hotel, arguably the nicest spot in Key West!

Perhaps we can get a tour when we go as The Gardens Hotel only accepts guests 16 and over, and I don’t think we can fudge that with our one-year old, even though he is “very advanced” (as all parents like to say)!  I remember we went into the reception area during our trip when I was 16.  My dad was telling funny stories about how the room used to be his aunt’s dining room and the chandelier had an active bee hive that dripped honey onto the table!  She was eccentric, but I think the concierge thought we were nuts!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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Sale of a Residence After Death – Part II

Originally published in the Cedar Street Times

April 5, 2013

Two weeks ago we discussed the sale of a personal residence after someone passes away when held as joint tenants or community property.  We also discussed the concept of a cost basis step up (or down) to the current fair market value at death as it relates to joint tenancy, community property, and tenancy in common.  If you missed this article you can find it on my website at www.tlongcpa.com/blog.  This week we are going to discuss what happens when a sole owner or tenant in common passes away and the house or fractional interest in a house goes to their trust or estate.

Often children are tasked with figuring out what to do with mom or dad’s house after the second spouse passes.  Names like executor, executrix, and trustee get thrown around and sometimes you get to know your accountant and attorney better than if you had gone on a fishing trip together!  After death, the house typically become part of the estate if there was no trust in place, and if there was, then it becomes part of an irrevocable trust that has the task of winding up affairs and distributing the assets to the beneficiaries (or trusts for the beneficiaries).

If the surviving spouse held the house as a sole owner or in his or her revocable trust before death, the house receives a full step-up (or down) in basis to the current fair market value at death.  If the house is distributed outright to a beneficiary (or beneficiaries) and then the beneficiary immediately sells the home, you often will have a loss due to the real estate commissions and other sales expenses (or perhaps even a market decline between date of death and the sale as we saw so often over the past five years).  This loss, however, will generally be a nondeductible personal loss unless you first convert it to a rental property, and then sell it later.

If, however, it is decided the house needs to be sold while it is still in the estate or trust in order to pay debts or to distribute the proceeds to various beneficiaries, you may have a case to take a deductible loss on the sale of the property (which would offset other taxable income in the estate or trust, or perhaps flow through to the beneficiaries reducing their personal taxes).  Fair warning, the IRS and the courts disagree on this issue!

The IRS has taken the position that even a trust or estate cannot take a loss unless it is a rental property or converted to a rental property and then sold.  However, this conflicts with some of the instructions they provide regarding capital assets held by trusts and estates. The courts, on the other hand, have held that a trust or estate does not hold personal assets, and thus is allowed to take a loss on the sale of what used to be the decedent’s personal residence as long as no beneficiaries live in the property in the interim.  There are other issues to consider here, but in the right circumstances, strategic planning could create some large tax savings.

If a tenant in common passes away, his or her ownership percentage receives a step in basis to the current fair market value and the interest flows through to the estate or trust.  Similar results would occur as those just discussed for sole owners.  It is less common to find someone holding a personal residence as a tenant in common, especially with unrelated people.  It also comes with other, more complicated issues, since fractionalizing ownership in a house diminishes the value – basically, who wants to buy a house with other people you don’t know?  In all cases after someone passes away, date-of-death appraisals are requisite, and you may need specialized appraisers for fractional interest properties.

This really just scratches the surface of the issues you can encounter, and it is always best to find a CPA and attorney team that is equipped to handle these issues appropriately.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.