This column first appeared in the San Antonio Express-News on April 12, 2016.
The tax issue you raise deals with payment of capital gain taxes on the sales proceeds from the farm and royalties. You inherited it all, and get a “free step up in basis” on your husband’s separate property portion, his community property portion, and the community property share which was already your asset. You do not mention whether the value of his estate was large enough to be subject to federal estate tax, and whether an Estate Tax Return filed with the IRS. His assets would have to reach $5.45 million in value before a return is necessary.
The value attributed to the farm and minerals is, by law, the fair market value on the date of his death. However, when the estate is subject to an Estate Tax, the Executor may elect to value the assets using other timing. Specifically:
1) If the property is sold within 6 months of the date of death, the property can be valued as of the date of sale; or
2) If the property is not sold within 6 months of the date of death, the property is assigned the value it had on the six-month anniversary of his death.
This is set out in section 2032 of the Internal Revenue Code, and is likely why your accountant is saying that the extra five days (after six months) is cause to get an independent appraisal. The accountant wants solid evidence of the values in case there is an IRS review. He is, however, basing his six-month standard on section 2032, which only mandates a post six-month appraisal when an estate owes federal estate taxes.
Appraisals are expensive when done properly, but so is an IRS audit. Your accountant wants solid figures to prove the property’s date-of-death value if the IRS demands proof. This is appropriate, but tying it to precisely six months because of section 2032 is very conservative. For instance, section 1014 of the Internal Revenue Code states that the basis shall be the property’s fair market value as of the date of death, unless the alternate valuation rules in 2032 are applicable. In your case, the alternative valuation rules would only apply if your husband’s estate reached $5.45 million in value.
If the alternate valuation rules are not applicable, “six months” is not a statutory standard for deciding if an appraisal is required. Instead, fear of an audit would be driving your accountant to seek an appraisal.
Since you sold the property, the date of death appraisals will be evidence on your personal tax return to establish that the amount of capital gain taxes due. Most often, property values do not change quickly, and selling the property soon after the date of death allows the negotiated sale price to equal the date-of-death value, resulting in zero gain. Your accountant feels that six months and five days is no longer “soon after death” and wants an appraisal for safety. Since you hired the accountant and otherwise trust his tax advice, you should strongly consider agreeing to his request.
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues. View past legal columns or submit free questions on legal issues via www.TexasEstateandProbate.com or www.Premack.com.