Q: My brother and I have inherited two properties. What's the best option for selling one and paying the least in taxes?

A: Dear Katy, TX:

Well, you have basically two options: 1) Sell the properties as part of the probate process, or 2) Distribute the properties to yourself and your brother and sell them later. Neither really has any effect on the taxes you will pay as far as capital gains.

When a person dies, their property receives a "step-up" in basis. Capital gains tax is calculated as the sales price less the property's basis. So, the basis for you and your brother is the same whether the property's are sold during probate or after distribution.

Of course, capital gains tax is not the only tax associated with Probate proceedings. And, there may be an issue with taxes you pay as a resident of Texas, for which I cannot give any information on. I recommend that your check with a tax professional who knows taxation for both California and Texas before proceeding and discuss the same with the attorney who is handling the probate.

One thing it may effect is the fee you pay the attorney (and executor) for probating the estate in California. The basic fee for ordinary services is calculated as a percentage of the value of the estate, called the fee base. The fee base is the value of the estate as stated on the Inventory and Appraisal, plus any additional property received and gains on sale and less any losses on sale. There is no deduction for any encumbrances (mortgages) on the property.)

Generally accepted accounting procedures calculates loss or gain on sale by deducting costs of sale (realtor commissions, title charges, and the like.) Thus, if a property is sold in probate it will show less of a gain (or more of a loss) for calculation of the statutory fee, which could save you some money. (Most, but not all, courts follow this calculation rule.)

Again, I recommend you discuss this with your probate attorney and tax professional before you proceed.