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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12681
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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DO YOU PAY INHERITANCE TAXES ON LIFE ESTATES, PENNSYLVANIA,

Customer Question

DO YOU PAY INHERITANCE TAXES ON LIFE ESTATES
JA: What state are you in? It matters because laws vary by location.
Customer: PENNSYLVANIA
JA: Has anything been filed or reported?
Customer: WE HAD ESTATE PROBATED. EVERYTHING IS WITH THE LAWYER. AN ESTIMATED TAX WAS SENT IN WITHIN THE FIRST 3 MONTHS. NOTHING ON THE PROPERTY YET. LAWYER SAID WE COULD DO CAPITAL GAINS, 3 SISTERS ARE ON DEED. NOW HE SAYS WE NEED TO PAY INHERITANCE TAX ON THE REST. WE THINK IT IS STUPID TO PAY 15 % ON CAPITAL GAINS AND 4 1/2% INHERITANCE ON THE REST. WHY WOULDN'T YOU JUST PAY INHERITANCE TAX ON ALL OF IT.
JA: Anything else you want the lawyer to know before I connect you?
Customer: NO I JUST NEED TO KNOW IF PA PAYS INHERITANCE ON LIFE ESTATES. THE DEED IS IN 3 OF THE CHILDREN'S NAMES SO WHY WOULDN'T THE PROPERTY JUST BE OURS
Submitted: 5 months ago.
Category: Tax
Expert:  Lane replied 5 months ago.

Hi. My name's Lane

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I hold a law degree, with concentration in Tax Law, Estate law & Corporate law, an MBA in finance,a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist)designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice to clients on three continents since 1986.

Bear with me just a moment and I’ll provide my initial response and then we can go from there if you have further questions on this.

Customer: replied 5 months ago.
OK
Expert:  Lane replied 5 months ago.

OK, first, if the sale was done AFTER the life tenant passes, then there will be a full step-up in basis to the fair market value as of the date of death. 9meaning that if the property was sold within a year or so of the death you'll likely have a small capital LOSS (because selling costs can be added to basis)

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If the property was sold while the life tenant was still living there would have been an exclusion of capital gain for the life tenant, if used as primary residence, and a gain to the remaindermen is based on the present value of the basis established at the time of the creation of the life/remainder split, and remain frozen there.

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Now, you are completely corre3ct about paying BOTH capital gains tax and inheritance.

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If you DO get the step-up because the property was sold, then there will be inheritance tax (THis is exactly the tax policy behind the law, that if an estate is subject to death taxes it shouldn't be subject to capital gains taxes too)

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But if you DON'T get the step up because it's considered IN the estate, there there will be no inheritance tax to pay.

Customer: replied 5 months ago.
WHAT EXACTLY DOES THE STEP UP MEAN? THE PROPERTY HAS NOT BEEN SOLD YET.
Expert:  Lane replied 5 months ago.

OK, capital gain = sales price- basis

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And "basis" for an asset is usually your investment in it (purchase price + improvements to the property)

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SO here, since the property wasn't sold while the life tenant is alive, the basis is stepped up to the Fair Market Value of the property as of the date of death.

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It's very rare for those selling a property that was inherited to have any gain at all (unless they held on for years and the property values rose above the date of death value).

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But what this DOES mean is that she HAD an interest in it when she passed, so there WILL be inheritance tax.

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Again, your intuition is good. It's (1) step up in basis (but included in the estate) so no gain with some inheritance tax,. or (2) No step up in basis if sold while life tenant is alive BUT no inheritance tax because it wasn't inherited, but never both

Expert:  Lane replied 5 months ago.

Please let me know if you have ANY questions at all, before rating me.

I hope you’ll rate me (using those stars, or faces on your screen, by clicking submit) based on thoroughness and accuracy, rather than any good news /bad news content.

Otherwise I’ll receive no compensation at all, from Just Answer.

Thank you!

Lane

Expert:  Lane replied 5 months ago.

Did you see my answer?