Hello all!

My wife's father just passed away. He lived in California and we live in Virginia. He left her 50% of his estate. The majority of what he owned was joint tenacy so she is in essence getting 25%. CA law states that the surviving joint tentant assumes ownership but his wife wants to honor his wishes so my wife will actually receive 25% of the joint tenant assets and 50% of the one property that he owned by himself.

The total value of the joint tenant property is about $1.7 million and he owned one house worth about $80k. So his portion of the estate is about $900k which she will get half.

I think it breaks down to something like this:

Cash = $80k
Home residence = $222k ($550k - $328K mortgage)
One piece of commercial property = $650k
Other commercial property = $800k (approximately)
Other property he owned solely = $80k

I assume the cash would be distributed when it's all settled.

The home residence has since sold and will close in a couple weeks.

The $650k commercial property will be placed on the market soon.

The $800k other commercial property will remain

Guess the sole property will remain also. ($80k)

I am approximating she will end up receiving about $250 in cash (cash plus sales proceeds) and own about $200k or so in rental property.

My question is what will we owe in inheritance/estate tax when it comes to Federal and State taxes and what will need to be reported.

I read some other posts about a 1.5 million exception so I am hoping his share of approximately $900k counts towards that limit.

Guess we will have to report the sale of the house and commercial property on our taxes. I read in another post about her Dad's basis being bumped up to FMV at the time of his death?

Any advice would greatly be appreciated. Kind of trying to figure out whether I need to hire someone to handle some of this for me or not. I have tried to include as much detail as I could.

Thanks in advance for you any help someone might be able to offer.

Keystone

Keystone:

If it has not already done so, the estate needs to hire a competent tax professional who is based in California, since both federal and state inheritance laws will apply. The estate executor should handle that. You and your wife should not have to hire someone, because the taxes are all paid by the estate; YOU will owe no income taxes (see below).

If your valuations are correct, there will be federal estate taxes and CA state inheritance taxes.

Federal estate tax rates start at about 18%. There is a $1.5M exemption, so you looking at a federal tax bill in the $35 - $40K range ($1.7M minus $1.5M equals $200K X 18% = $36k).

I cannot address the California inheritance tax rates in detail, but, assuming that California also exempts $1.5M, it should not be much more than $10K (a guess on my part).

The FMV of all assets bump up to the FMV on the day of her Father's death, or on the day exactly six months later (at the estate's option). This is done for valuation purposes. Any inbedded capital gains (and the resultant taxes) are forgiven, so when your wife gets the rental property, it will have the day of death (or six months after) FMV as its basis.

You do not report any of the money/assets received from the estate on your joint income tax return. All inheritances are taxed by the federal estate tax/state inheritance taxes and are thereafter tax-free to the heirs. Assuming the properties will continue to generate income during the (at least) one-year period while the estate is being probated, the estate will file at least one and probably two fiduciary tax returns (Form 1041) and the estate will pay any federal/state income taxes due (another reason for the estate to hire the tax professional).

However, once the titles of the rental properties are transferred into your wife's name, you then must report the income generated by the property via Schedule E on your federal income tax return. Further, you will have to report the income on your Virginia state income tax return and, since the property is in California, file a California state income tax return. For these reasons, if you do not already use a tax professional, you will need to start using one. Be sure he/she is capable of filing a California tax return, which, BTW, is one of the more complicated state income tax returns to file.

Atlanta tax expert,

Thanks for your reply. Is his estate value at 1.7 million even though he only owned half of it? The total value of the properties owned by him and his wife totaled 1.7million and he was the joint tenant. So that left about $900k to be split between his wife and my wife. Thanks again for your help.

Keystone

Keystone:

Relooking the information you provided, I am adjusting the estate's value to $2.2M. In my opinion, the mortgage(s) on the properties will not reduce the value of the estate for tax valuation purposes.

That puts your federal estate tax bill at about $126K and your state bill around $50K.

ATE,

Very good point about including the entire house value in the estate calculation. Where I am still confused in the calculations is that her father only owned 1/2 of these properties. So wouldn't his estate be worth half of the 2.2 million figure calculated above? His wife is still alive and she owned the other half. Thanks again for all of your help.

Keystone

Keystone:

Perhaps you are right. Again, the tax professional who is handling the fiduciary return will do the necessary valuation in order to file the estate financial reports and file the estate tax return.

Thanks for all of your help.

Keystone

That's why we are here. Glad to help!