Understanding 'stepped-down' tax basis for real estate

If value has dropped, gifting property before death may be smart tax move

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted May. 30, 2012

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You then add any capital improvements made to the property. As a rule of thumb (to be confirmed by your accountant), if the improvements are considered to last more than one year, they can be added to your basis. That's referred to as the "adjusted basis."

You then take the sales price and subtract the adjusted basis. That, in general terms, is your profit. You may also have to recapture any depreciation that the LLC took over the years, but again, that's something your accountant will have to assist you with. And since your father did not own the property on his death -- the LLC did -- there is no stepped-up basis.

But the mortgage amount is irrelevant in determining profit.

DEAR BENNY: Could you please inform me if the old law of easements -- where if you use an easement for over a period of years it becomes yours -- has been overturned? I believe I read in your column that it now applies only if there is a home or swimming pool on the easement line; otherwise, it always is reverted back to the original owner. --Patricia

DEAR PATRICIA: I do not believe I wrote that. You are referring to the law of "adverse possession," whereby if you use someone's property for a period of time spelled out in your state statute in a manner that is open, notorious and hostile, you can go to court and the court will order that you are now the property owner.

I have heard that many states are considering repealing (or modifying) this law, but do not have specifics. You may find information on the Web about your state law.

But don't confuse "easement" with "adverse possession." If you have a recorded easement that runs with the land in perpetuity, that's yours forever.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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