Dear Benny: My wife and I purchased the model house in a new development, including all the furnishings within the home.
I guess I should have been more vigilant at settlement, but the real estate transfer tax was based on the total sales price of the home. It was only recently that I obtained a copy of the appraisal and learned that the appraiser included nearly $80,000 for the furnishings within the home, which meant I paid almost $800 more in transfer tax than I should have.
Do you think if I petition my local county tax office there’s a chance of getting a refund? — Bob
Dear Bob: It never hurts to ask. The county tax office can always say no. Unfortunately, counties throughout the country are desperate for money, and they may give you a hard time.
But even if they refuse, and if their next tax assessment includes that additional $80,000, you should consider filing a tax assessment appeal. Every jurisdiction allows such a procedure, although the process differs from state to state.
In the final analysis, don’t forget to include the full amount of the tax when you compute your tax basis. Although you cannot deduct the recordation or transfer tax when you file your annual income tax return, that amount can be added to the purchase price, thereby increasing your tax basis.
The higher the basis, the less tax you have to pay, assuming, of course, that you cannot take the up-to-$250,000 exclusion of gain (or up to $500,000 if you are married and file a joint tax return). And even if you are eligible for the exclusion — because you have lived and owned the house for two out of the five years before you sell it — many homeowners have made, or will make, more than the exclusion allows.
Accordingly, it is important to include every legitimate dollar you can so as to increase your tax basis.
Dear Benny: We heard that it’s a good idea to add your adult child to your deed so that at your death there will not be inheritance taxes/death taxes, etc.
Can you discuss the pros and cons of adding our 18-year-old daughter to the deed to our house, including current tax implications as well as any upon our deaths?
We still owe around $75,000 on the house. Would we have to add her as a responsible party on the mortgage as well? — Sandra
Dear Sandra: This is a very personal issue that only you and your husband can answer. However, I don’t think it’s a good idea for two important reasons.
First, you could be creating a tax problem for your daughter if she ever sells the home. This is somewhat complicated, but if you add your child to title, her tax basis is your basis. In general, tax basis is the amount you paid when you bought your house, plus any improvements that add value to your house.
Let’s say you bought the house for $100,000 and made no improvements. Your tax basis is $100,000, or $50,000 for you and the same for your husband. Let’s further assume that when your husband dies, the house is worth $200,000. Although the stepped-up basis was repealed for year 2010, the new tax law that President Obama signed Dec. 17 restores that concept beginning Jan. 1, 2011.
So, when your husband dies, you get the stepped-up basis. Your basis now becomes $150,000 (your original $50,000 plus your husband’s basis on the date of death).
Let’s further assume that when you die the house is worth $400,000. Your daughter will now inherit the house, and her tax basis is the value of the property on the date of death, namely the $400,000. If she decides to sell at that price, she will have had no gain and thus will not have to pay any capital gains tax.
But if you add your daughter to the title, the Internal Revenue Service will treat it as a gift. Let’s say you give her one-third of the house. You and your husband are still alive. Accordingly, her basis becomes $33,333.
Yes, when both mother and father die, the stepped-up basis is available to her. But if you do the numbers, it will still be less than if she inherited the house.
Of course, if she buys in at a market price, that would increase her basis. But then both of you, as sellers, might have to pay some capital gains tax. If you have owned and lived in the house for two out of the five years before you sell it to her (and you file a joint tax return) you may be eligible for the up-to-$500,000 exclusion of gain. But talk to your own tax adviser to confirm your particular situation.
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 firstname.lastname@example.org.