Real Estate Tax Questions And Answers

With tax season just around the corner, several people asked me to write another story based on various tax questions that homeowners continually have. Because I am not a tax expert I decided to change the format to a Q & A format so that the answers come directly from an experienced accountant. In this case, San Francisco based CPA David Kupferman kindly agreed to answer these homeowner tax questions.

What Is The Difference Between Basis, Adjusted Basis And Stepped Up Basis?

TO MAKE THE ANSWER SIMPLER LET’S JUST PRETEND we’re talking about that nice 10-unit rental building you just inherited from your dear late Uncle.

• “BASIS” – is essentially your Uncle’s ridiculous original 1960 (all-in) purchase price of $60,000. (This is also called “Cost Basis”).

• “ADJUSTED BASIS” – is Uncle’s original $60,000 Cost Basis plus any big improvements he made to it (like, if he paid $400,000 for a new foundation in 1985, nothing else) but Depreciation was $100,000 then his “Adjusted Basis” would be $360,000.

• “STEPPED UP BASIS” – commonly refers to the building’s value when your dear Uncle died, when you inherited it. So if it was worth $5 million when you inherited it then $5 million is your “Stepped up Basis”

º It’s as though you paid $5 million (you didn’t) for the building – you then get to expense that big value (not his lousy, original $60,000) against rental income. How nice!

º Warning: “Stepped up Basis” is sometimes confusingly ALSO referred to as “Basis”.

º “Stepped up Basis” is however an amazing, little advertised giant loophole permitting generation after generation of wealthy Americans to repeatedly deduct/depreciate the cost of rental property over and over again.

• The explanations above were a rough overview of what can be a complex area…

“If however you’re asking why can’t you roll over your IRS into your home well, then, NO you cannot do it. . . . Be wary of anyone encourage real estate investment within your IRA – there are many trip cords and minefields.”

Do The Government Documents Use The Same Names?

• Government tax forms commonly use follow the above “basis” definitions.

• But on the tax forms there can be multiple levels, subtotals and columns which ultimately follow the above scheme…sometime the forms clearly state what a number is but at other times it’s not well stated, it’s pure gibberish like “Enter result of Section 121xyz(a)(1)(i) adjustment on Line 29b”…

• But (believe it or not) generally there is logic and rationale in the tax forms. Generally.

Why Do I Have To Pay Taxes?

• Good question and thanks for asking it without curse words.

• Some countries have extremely flexible laws, you can easily have multiple sets of books, it’s easy to bribe tax

officers, hey life’s easy.

º But then again the roads are bad, crime can be rampant, there Is malnutrition, the army and nation is weak,

universities do no research, etc…

• So there is a cost to living in fairly well run modern civil society and that cost are the taxes we pay.

• Of course much government fat needs cutting, including whole departments. Tax reform always unfairly focuses on rich mega corporations instead of small business businesses (the true engine driving America) but… I’ll stop now else I’ll NEVER finish….

Don’t I Get To “Rollover” My Funds Into A New House?

• It used to be you could do something like that but now $250,000 person or $500,000 per couple is the gain on the sale of your home that you can get tax free and that’s a good deal. (Don’t’ get tricky though and think that you can bump this up via multiple spouses – the limit is $500,000.)

• If however you’re asking why can’t you roll over your IRS into your home well, then, NO you cannot do it… Be wary of anyone encourage real estate investment within your IRA – there are many trip cords and minefields.

How Do I Know What My Capital Gains Taxes Will Be?

• If you’re referring to the sale of your home you’d take your sales price, LESS your adjusted cost basis (or stepped up basis), LESS selling costs and generally that’s your gain. This is a simplistic rough approach…there can be numerous other factors but the simple formula roughly gets you there….

• If you’ve involved factors such as half-stepped up basis, you once rented and/or depreciated it, you had debt forgiven on it, etc., then consult a CPA for a proper and full calculation.



Editor’s Note: Keith Rockmael is a POA and real estate advocate and agent. He can be reached by email at keith@resourcerock.com