What Is Cost Basis and How Do You Prove It?

Tax formsKnowing the “cost basis” of your property is important for tax purposes, but proving cost basis can be difficult. Cost basis adjusts at death, so it is a good idea to appraise property when a joint owner dies.

Cost basis is the monetary value of an item for tax purposes. When determining whether a capital gains tax is owed on property, the basis is used to determine whether an asset has increased or decreased in value. For example, if you purchase a house for $150,000, that is the cost basis. The cost basis can be increased by improvements to the property. If there are no improvements and you later sell the house for $250,000, you will have to pay taxes on the $100,000 increase in value.  (However, if the property is your principal residence, you can exclude up to $250,000 in gain, or up to $500,000 for a couple.)

When a property owner dies, the cost basis of the property is “stepped up.” This means the current value of the property becomes the basis. For example, suppose you inherit a house that was purchased years ago for $50,000 and it is now worth $250,000. You will receive a step up from the original cost basis from $50,000 to $250,000. If you sell the property right away, you will not owe any capital gains taxes.

When a joint owner dies, half of the value of the property is stepped up. For example, suppose a husband and wife buy property for $200,000, and then the husband dies when the property has a fair market value of $300,000. The new cost basis of the property for the wife will be $250,000 ($100,000 for the wife’s original 50 percent interest and $150,000 for the other half passed to her at the husband’s death).

The burden is on the property owner to prove cost basis, and it isn’t always easy to prove, especially if it has been awhile since the property was purchased or improvements were made. Homeowners should keep good records of improvements to a house, which means keeping receipts and purchase orders. If a joint owner of property dies, you should get the property appraised to show the value at the time it is “stepped up” in basis. Be sure to save the documentation so you can use it later.

 

 

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Probate v. Non-Probate: What Is the Difference?

When planning your estate it is important to understand the difference between probate and non-probate assets. Probate is the process through which a court determines how to distribute your property after you die. Some assets are distributed to heirs by the court (probate assets) and some assets bypass the court process and go directly to your beneficiaries (non-probate assets).

The probate process includes filing a will and appointing an executor or administrator, collecting assets, paying bills, filing taxes, distributing property to heirs, and filing a final account. This can be a costly and time-consuming process, which is why some people try to avoid probate by having only non-probate assets.

Probate assets are any assets that are owned solely by the decedent. This can include the following:

  • Real property that is titled solely in the decedent’s name or held as a tenant in common
  • Personal property, such as jewelry, furniture, and automobiles
  • Bank accounts that are solely in the decedent’s name
  • An interest in a partnership, corporation, or limited liability company
  • Any life insurance policy or brokerage account that lists either the decedent or the estate as the beneficiary

Non-probate assets can include the following:

  • Property that is held in joint tenancy or as tenants by the entirety
  • Bank or brokerage accounts held in joint tenancy or with payable on death (POD) or transfer on death (TOD) beneficiaries
  • Property held in a trust
  • Life insurance or brokerage accounts that list someone other than the decedent as the beneficiary
  • Retirement accounts

When planning your estate, you need to take into account whether property is probate property or non-probate property. Your will does not control the distribution of non-probate property. Check the ownership of your property and your accounts to make sure jointly owned property will be distributed the way you want it to. It is also important to review your beneficiary designations.

Contact us to determine whether your property is being distributed according to your wishes.

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