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Calculate tax bite of real estate buyout

Dear Benny: My parents are both deceased.

Mom died in 1999. Dad passed in 2004.

Their house now belongs to my brother and me, and my brother moved into the house in 2007. He is supposed to go to the bank soon and get a loan to purchase my interest in the house for $103,500, which is the amount we have agreed on.

I have been told by one tax preparer (not a tax lawyer) that I will not have to pay taxes on the amount because it will be an inheritance, but a loan officer at my credit union advised me that she thinks I will have to pay taxes.

I’d like your opinion on this. Please don’t tell me to see a tax lawyer. I hate lawyers. They don’t always help you, and they drag their feet and charge you a bundle.

This has been my experience with lawyers in the past, and I cannot stand the thought of having to go to another one.

–Clara

Dear Clara: I am a lawyer and understand your concerns. However, I can assure you that all attorneys are not as bad as you think.

My first question: Did you or your brother probate your dad’s estate? If not, you should do so immediately. Otherwise, whether you or a stranger try to buy the house, you will find that the title company — called escrow companies in some Western states — will tell you that you do not have proper title.

Assuming that you did probate the house, let’s assume the property was worth $200,000 on the date your dad died in 2004. You and your brother get what is known as the stepped-up basis. In other words, your tax basis is the value of the property when your dad died.

Tax basis is what the IRS looks at when determining if a home seller has made a profit. If the value was $200,000 when your dad died, your tax basis is $100,000 and your brother’s is the same.

If your brother buys the house at $103,500, and assuming that you did not make any improvements to the house, you will have made a profit of $3,500 ($103,500 minus your basis of $100,000).

So, in my example, for tax purposes you will have made a small profit and will have to pay capital gains tax on that profit. The current federal tax rate is 15 percent, depending on your income, so you may have to pay $525 plus any local or state capital gains tax.

You don’t have to go to a lawyer to assist you, but you should talk to a professional accountant, as you may have to pay a tax.

Dear Benny: My adult daughter, a veterinarian, and her husband, who is employed, live in a very unusual house.

They have owned this home for several years. They have good credit and payment history. The house was built in the 1930s and consists of four circular brick interconnected “yurt style” modules. It has been maintained and modernized and is in good condition. It is located in a neighborhood of houses ranging from fairly modern ranches to older Victorians.

They contacted the mortgage company that originally financed the house to discuss refinancing to a better rate. They were told that due to the unique style of the house, it was not possible to come up with comparables for the assessment.

My questions are: First, is this strictly legal? There is equity and payment history and they are not seeking additional funds. Second, if this is legal, what would your advice be to them?

–Dave

Dear Dave: First, I had to learn what a “yurt style” house looks like. From my research, its origination is what Central Asian nomads lived in for centuries.

I cannot believe that some competent appraiser cannot come up with a market value of the house. I talked with one appraiser in my area, and she told me that there are courses given to appraisers on unique houses, and clearly your daughter’s house is unique.

This is especially a concern because the lender you are asking for a refinance loan did the original loan in the first place.

I think that the lender just does not want to get involved. My suggestion is to contact an appraiser on your own and see what he comes up with. I also suggest that your daughter consider looking for another lender.

She and her husband have good credit, so they clearly should be able to find a lender willing to refinance their current loan.

Benny 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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