Calculating the cost basis property that’s been in the family for years

Dear Tax Talk,
My father bought a house many years ago that is fully paid off. He now wants to gift it to me. What are some of the tax consequences and other considerations we should think about?
— Hugh

Dear Hugh,
Because your father inherited the property, the general rule for you to use is the fair market value, or FMV, of the property on the date of your grandfather’s death. However, as is usually the case with the IRS, there are exceptions to the general rule and you need to be aware of them in case any of them apply to your situation.

The exceptions could come in to play in the following situations where Form 706, United States Estate Tax Return, was filed with the IRS:

1. If the executor of the estate or the personal representative chose to use the “alternate valuation date,” then you would use the FMV on that date, which is six months after your father’s death.
2. For estate tax purposes, there are special-use valuation rules if this property is a farm or closely held business. I will not go in to the details at this time but just wanted to point it out as one of the exceptions.
3. There are special rules if the property was considered a “qualified conservation easement” and the value was adjusted on the estate tax return.

The estate tax is really a tax on the right to transfer property at your death. Most estates are not required to file an estate tax return. For 2017, they are required when the combined gross estate and prior taxable gifts combined amount to more than $5.49 million.

One final note to you is that you will need to increase your basis by any capital improvements made by you once you received the property from your father. The sales price of the property minus your cost basis determines the amount that will be subject to capital gains tax.

Please do not hesitate to consider sitting down with a qualified tax professional to help you with this very important calculation. It will be worth your time.

Thanks for the great question and all the best to you!

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