"THIS SHOULD BE FAIRLY PAINLESS"

"Open wide," my new dentist said, (who looks only slightly older than my son, Case.) "This should be fairly painless."

"Thank you," I replied, relief flooding over me. "Just so you know," I continued, "my childhood dentist was a SADIST, so excuse me if I break out in flop sweat." (I didn't, but there was the distinct possibility.)

Fear is my overwhelming response to the dentist - any dentist - which isn't to say that my adult experience with MANY caring and capable professionals over the years hasn't done much to erase my dental anxiety. Still, childhood trauma is always a tough history to rewrite. (Maybe I can now lay that to rest; Dr. Clark Kami was as gentle as they come.)

This latest appointment represented the final phase of a multi-month process that included a failed root canal, several trips to the oral surgeon's office (Dr. Alex McDonald rocks!), removal of the offending tooth, subsequent surgeries, and the insertion of a screw for the new crown to adhere to. In short, I've been walking around with a BIG hole in my mouth for the past six months waiting to heal, and at long last, I now have a fully restored set of teeth thanks to these two talented doctors and their respective teams (chomp, chomp).

While it seems like it's taken forever, six months actually flew by much faster than I realized.

I bring this up because I recently met with a friend who lost her husband in 2020 and is now considering selling the home they owned together.

"Did you get a stepped-up basis on the property upon his death?" I asked, making the assumption that she had. (Not to belabor the point, but a "stepped-up basis" should be done within six months!)

"What's that?" she said.

Uhhh, right. (I should have reached out when I heard the news. My sincere apologies.)

For those unclear on the concept, a "stepped-up basis" resets the value of your property to the current market value at the time of death, thus helping to avoid the significant capital gains that a subsequent sale might incur.

By way of example. . . if you and your mate bought your home 15 years ago for $500,000, but the property is now worth $2,000,000, without a stepped-up basis, the difference of $1,500,000 - ie: the capital gain (minus the $250,000 tax-free deduction a single owner can claim) would create a sizable tax event on the net income of $1,250,000. OR, if you and your siblings have inherited your parents' property now worth MORE than you ever dreamed possible, without the "reset button," the inheritance tax could be rather startling (and will be).

However, if you go to the trouble of ascertaining the current value of the property, your starting point with respect to capital gains begins at the time of your partner's/parents' death - not at the original sales price you paid those many years ago. (Follow?)

So significant is this tax benefit - especially in high-end neighborhoods like ours - that many elderly homeowners will choose to age out in their family homes so that their heirs will reap this hefty benefit, OR they will wait for their significant other to pass away before selling, which, unfortunately, often keeps the elderly in their overly large homes much longer than they might wish (and exacerbates the lack of available housing stock). Every action has a REaction that's often not clearly anticipated or understood.

BTW - getting a "stepped-up basis" is as easy as reaching out to your local Realtor® or to a qualified Appraiser who can quickly pull up the sales comps and draft a letter on your behalf.

Sarah and I perform this function often enough that we've developed a standard form we quickly customize to each individual property and circumstance as they surface. A smart Realtor® will typically perform this courtesy free of charge in the hopes that you'll call on them down the road should you decide to sell, but it's certainly worth the dollars you'll pay a professional Appraiser to put the question to rest. Think of it as an investment in your future. (Because it is.)

With respect to inherited property, if dad passes away first, and mom passes away 10 years later, you should get a "stepped-up basis," for both events, as it's likely the home will have appreciated in the intervening years. If you and your siblings don't sell the home for several more years and additional appreciation is accrued over time, you may, in fact, pay capital gains on the difference realized in the ensuing years. (Please speak with a financial advisor, real estate attorney, or CPA for more information.) Like it or not, that seems only fair.

More to the point, while resetting the value should be done within six months' time, it's understandable that in the throes of grief, this little-known tax advantage often slips by untended. However, Allison Teeman, of Yovino Young Appraisers assures me that she has created a "stepped-up" basis for Sellers a decade AFTER they've inherited property, "even after they've SOLD the property and are closing escrow . . ."

So if you meant TO, forgot TO, or didn't know TO . . . fear not; there's still time to address this important benefit.

Finally, a "stepped-up" basis document is a useful tool for your CPA and financial advisor, and I'm guessing that Uncle Sam IS going to request a copy once you sell and file your taxes, but a real estate valuation (REV) is not a document that requires legal recording, per Allison. It seems as if the title company and the IRS will take you at your word. (Of course, a comp sheet will undoubtedly be required to support your position, which is where your friendly neighborhood Realtor® comes in!)

As a footnote, when people discuss "generational wealth," this is how it transpires and grows. Whether you believe it to be inherently fair or not is another topic for another day, but as it's currently the law, you might as well use it to your advantage. (It's unlikely that it will always apply.)

How's that for fairly painless?

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