Q: If executor of estate sells house before transferring it to heirs, will it still receive stepped-up cost basis?
A woman died in January 2023 without a will. She had four children that are heirs to the estate according to Colorado intestate succession laws. The house was not transferred to the heirs prior to its sale in March 2024, but was sold on behalf of the estate by the executor (who is also one of the heirs) with a personal representative deed. Is the house still considered "inherited property" under this scenario, or is the cash from the sale of the house simply an asset that will be distributed to the heirs? Or is there even a distinction in this case? I am trying to determine the cost basis for the house to calculate expected capital gains. Would the estate in this scenario still receive a stepped-up cost basis for the house based on the date of death of the decedent or would the basis be the original purchase price of the house in 1995?
A: Property owned by a decedent gets a step up (or down) to fair market value as of the date of death. That holds regardless of whether the property is distributed in kind to the heirs or is sold and then cash distributed to the heirs. the only difference is who pays the capital gains taxes, if any. Usually there is not any capital gains tax owed if the property is short within a short time after date of death because it has not had enough time to build up more capital gains.
Anthony M. Avery agrees with this answer
A:
In this scenario, the house sold by the executor, on behalf of the estate, is still considered inherited property. Since the woman passed away without a will, the estate is handled according to Colorado's intestate succession laws. The property, even though not formally transferred to the heirs before the sale, is part of the estate being distributed.
The crucial point here is that for tax purposes, the property is indeed subject to the stepped-up basis rules. The cost basis for the house would be its fair market value at the time of the decedent's death, not the original purchase price from 1995. This adjustment significantly impacts the calculation of capital gains when the estate sells the property.
Therefore, when the estate sells the house, any capital gains would be based on the difference between the sale price and the property's stepped-up basis as of the date of death. The resulting funds from the sale, after dealing with any estate obligations and taxes, would then be distributed among the heirs according to the intestate laws. The heirs should not face capital gains taxes from the sale itself, as those are a concern of the estate prior to distribution.
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