Question

Todd and Melissa, husband and wife, own property jointly. The property has an adjusted basis of $400,000 and a fair market value of $500,000. a. Discuss the rules for the calculation of the adjusted basis of the property to Todd if he inherits his wife’s share of the property and Todd and Melissa live in a community property state. b. If they live in a common law state?

Answer 1

a) Calculating adjusted basis in an asset begins with its original purchase price. You can increase your basis from there by adding the amount of money you've spent improving the asset, as well as any amounts you might have paid for legal fees or the costs of sale.

How Adjusted Basis Works

Your basis would be the amount of money you initially paid for the property if you sell real estate that you didn't live in for the required number of years to allow you to qualify for a capital gains tax exclusion. You can then add to this the cost of any capital improvements you might have made, as well as agent commissions and other costs of sale.

But you must effectively recapture any tax deductions you took for the property in previous years by subtracting them from your basis after you've added in the above costs. This would be the case if you've been depreciating the property on your tax returns since you've owned it.

How to Get Your Adjusted Basis

The key components of basis calculations are cost, plus increases, less decreases. Items can be added to achieve adjusted basis and others must be subtracted.

Cost Basis

The basis of property is usually its purchase price the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for:

Sales tax

Freight

Installation and testing

Excise taxes

Legal and accounting fees when they must be capitalized

Revenue stamps

Recording fees

Real estate taxes if they're assumed for the seller

Increases to Basis

Increase the basis of property by all items that have been properly added to a capital account. These include the cost of any improvements that are expected to have a useful life of more than one year.

Items that can increase the basis of property include:

The cost of extending utility service lines to the property

Impact fees

Legal fees, such as the cost of defending and perfecting title

Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements

Zoning costs

The capitalized value of a redeemable ground tent

Decreases to Basis

Some items reduce the basis of property. They include:

Section 179 deduction

Nontaxable corporate distributions

Deductions previously allowed (or allowable) for amortization, depreciation, and depletion

Certain vehicle credits

Hence the adjusted basis of the property to Todd if he inherits his wife’s share of the property and Todd and Melissa live in a community property state will be $400000 which is cost.

b) If they live in common law state-

Inheritance of their spouse’s property as long as there is a valid will (but if a spouse dies without a will, his or her children and other family members will have inheritance rights).

ouples who move out of the state in which they established a common law marriage need to be aware that all states recognize a common law marriage that a couple legally entered into in another state. Still, after the move, they may want to sit down with an attorney in their new state to be sure they meet the legal obligations required to maintain their rights as a married couple. Keeping good records, especially if they move around a lot, can help when it comes to claiming federal benefits.