To: The Managing Partner
From: Tax consultant
Date: 29th October 2011
Subject: capital gains tax on inherited property
Wilma inherited a house from her Uncle John who passed away recently. Bob had taken a reverse mortgage on the house indicating that he was paid money each month until his death and the amount paid to him plus interest accrued formed the total balance on the mortgage upon his death which amounted to $210,000. The mortgage can only be enforced on Bob’s house and not any other asset and the beneficiaries of Bob including Wilma cannot be held liable for the debt. The fair market value of the house upon Bob’s death was $90,000
To establish the tax basis of the inherited property
To establish the effect of taxation on her three options and to calculate the amount of taxable capital gains in each of the three options namely;
1. Walking away and letting the bank foreclose the house.
2. To offer to settle the loan with the bank in cash at the home’s fair market value of $90,000 and then staying in the home herself.
3. To sell the house to her neighbors at the cost of $90,000, incur 7% realtor fees and closing costs, pay the bank a negotiated amount totaling to $80,000 therefore remaining with $3,700.
Analysis: Based on the Internal Revenue Services’ (2011), if an individual sells an inherited property for more than its fair market value, then he/she is liable for capital gains tax because the property will result to a capital gain (IRS, 2011). The tax basis of inherited property may be determined using the fair market value or the executor’s valuation however the executor’s valuation cannot exceed the fair value of the inherited property at the time of death. ...