Stautz Law

Tag: Tax

  • Step Up in Basis Indiana Houses

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    Good morning, folks. It’s Andy Stautz at Stautz Law. I am back for another talk about an estate planning topic. And this topic is step-up in basis for houses. So this is a tax, this is kind of a tax planning topic.  

    Step-up in basis is an important concept to understand in your estate planning because it’s probably the biggest tax effect you’re going to feel, or your heirs are going to feel, really.  

    Other Estate Taxes Not Likely

    As you might know, and as I’ve talked about elsewhere, the current threshold for the federal estate tax is really high. It’s like $15 million under the new law, and that’s per person. So most people just don’t have to worry about a federal estate tax anymore. And Indiana abolished its inheritance tax, getting to be a long time ago now, you know.  

    Planning for Income Taxes

    So for most people, it’s kind of income taxes that they need to worry about, or income taxes for their beneficiaries. And so for a lot of people where the house is kind of one of the big assets in their estate, you’ve got to say, OK, well, what’s the tax consequences for my beneficiaries going to be if you use a transfer on death deed? You know, that’s probably the most common device, or pass it by will, or put it in a trust.  

    And the answer is usually there aren’t huge tax consequences for your heirs. And that’s because the step-up in basis adjusts your basis in the house or in the real property from your basis to whatever the value of the house is at the time of your death.  

    How Step-Up in Basis Works

    It helps to talk about an example. Let’s say you bought a house in 1990 for $100,000, and now it’s worth $400,000. If you were to sell the house right now, you would owe capital gains tax on the $300,000 in capital gains. That’s the $400,000 sale price minus the $100,000 of basis (the amount of money you put in to start with).  

    Now, there is an exemption from capital gains on the sale of primary residences, which is $250,000 per person or $500,000 for couples. So for most ordinary people, selling houses, they don’t actually have to worry about capital gains taxes.  

    But if you’ve held a property for a long time or it’s appreciated a lot, you know, maybe you’re getting kind of close to that, kind of close to that tax hitting. actually coming into play.  

    But the step-up in basis for the house would be if you have a transfer on death deed, you leave the same $400,000 house to your heirs, you die next year, sorry to hear it, your heirs have a $400,000 basis in the house. That means if your heirs inherit the house, it’s worth $400,000, their new basis is $400,000, and they sell it right away, they owe $0 in capital gains taxes, because there’s been no gain since that basis was stepped up, since it increased from your basis of $100,000 to the fair market value of date of death, $400,000.  

    So even if there were no capital gains exemption on the sale of a primary residence, your heirs usually don’t have to deal with capital gains taxes for an immediate sale.

    But the upshot of all of that is the step up in basis means inherited houses, inherited real estate is not going to be a huge tax problem for your heirs if they sell it right away.

    And that’s kind of good for heirs who aren’t planning to live in the house, because to get that exemption from capital gains taxes, they have to live there for at least two years. So for heirs who inherit a property and sell it right away, the step-up in basis means there’s $0 in capital gains taxes owed, and it doesn’t matter that they don’t get the exemption. If they don’t. (Obviously, they can move in and hold it, and that’s a new consideration.)  

    But the upshot of all of that is the step up in basis means inherited houses, inherited real estate is not going to be a huge tax problem for your heirs if they sell it right away.

    Step Up in Basis vs. Lifetime Gifts

    Obviously, if they hold it, different story, and, you know, This is one of the reasons, by the way —and this will be kind of my last topic, we’re coming up on five minutes— One of the reasons you need to think carefully before making a lifetime gift of your house or appreciated real property is because then you won’t get that step up in basis. So if you give the property away during your lifetime, the basis stays with it. But just a traditional transfer on death deed, will, trust you get the step up.  

    Okay, that’s all for today. It’s a complicated topic, obviously, but that specific question comes up enough. I wanted to answer it. I hope it’s been useful as an informational topic.  

    And if you are doing Indiana estate planning and probate, I’ve got offices in Indianapolis and Greenwood, and I’d love to help you out with your case. You’ve got my contact information on the website and here on the end screen, so goodbye for now. 

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  • What is an EIN?

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    Good morning, folks. It’s Andy Stautz at Stautz Law. It’s casual Friday here. It’s like 95° in Indianapolis. We’re back for another quick talk about a probate topic. This one is “what is an EIN.” And this is a question that I have to answer for my probate clients after they’re appointed as a personal representative by the court.  

    When do you need an EIN in probate administration?

    So probate is opened, the initial filings are done, the court issues an order appointing the personal representative and directing them to administer the estate. At that point, in the court’s instructions in the case of Marion County (in Marion County, you know, there are these specific instruction documents that get issued to every personal representative by the Court. Same thing in Hamilton County, so if you’re up in Carmel, you know, Noblesville, same thing.) These instructions and my instructions, which are the same, are: obtain an EIN for the estate.  

    What is an EIN?

    OK, so what’s an EIN? An EIN is an employer identification number. It’s a type of taxpayer ID number that the IRS issues. So I said a taxpayer identification number. The most common one is your Social Security number. That’s for you as an individual. But if you start a business, you know the business has an existence separate from you. So it gets its own. It’s like a Social Security number for a business. It gets its own taxpayer ID.  

    Why does an estate get an employer identification number?

    Now, wait a minute, you might be saying, it’s called an “employer identification number.” You’re talking about businesses. What does that have to do with probate estates?  

    Well. An estate, a probate estate, is treated by the IRS as a stand alone entity, kind of like a business. So even though you’re not employing people, and even though it’s not a profit making venture, it’s still close enough that that the IRS needs it to have its own number. 

    And instead of having a whole bunch of different types of numbers, you just get an EIN and it identifies the estate for federal tax purposes. So that’s kind of what it is.  

    Every estate needs one because you need to report the estate’s taxes to the IRS separately from the decedent’s personal taxes. That’s a huge topic. We’re going to leave it aside for today, but you need this number. 

    Using an EIN to open estate bank account

    And you’ll need it to open an estate bank account. When you’re gathering the property, you need somewhere to put it. You don’t want to mix it with your own funds, right? That’s a big no no for a personal representative. So you need the EIN to go to the bank to open an estate bank account, to put all the decedent’s property in. Straightforward enough.  

    How Do You Get an EIN for Your Estate?

    Then the next topic is kind of how do you get an EIN. It’s really easy. There’s an online application that the IRS has and the personal representative can do it himself or herself or your attorney can do it for you.  

    So I, you know, I give my clients the choice. Because it’s that DIY route, you know. Do you want to pay the attorney to do more work for you, or do you want to just go for it? It’s simple enough that most people could do it on their own. But you know, I’ve got lots of practice and I can make sure it goes right too.  

    To do that, you know you need advanced permission. I can’t just pretend to be you. Right? Like you need to authorize someone else to apply for the EIN on your behalf. But it’s a really simple screen and it’s, you know, you choose “I’m trying to open an estate.” “Here’s the decedents information” you know, “here’s the personal representative.” And it usually issues right away. You get a confirmation thing right away and they follow up by mail.  

    So no mysteries there. That’s what an EIN is. It’s just a separate taxpayer ID for the estate. It’s easy to get and you need one for an estate. Bank. Account. So if you’ve got any questions, you know you can call me. You can e-mail me if you’re already my client, obviously. And hopefully that kind of explains that aspect of the state administration. That’s all for now. Thanks and bye.

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