Real Estate Group Newsletter – Summer 2023
Tamara Partridge

How Do Homes Pass After Death?

Tamara Partridge, CPA MST

One of the many questions that can arise after the death of a loved one regards the future ownership of their home — and how the transfer of that home can affect the tax liability of the new owner and the estate itself. Read on for a brief summary.

Who Owns the Home?

Several factors determine post-death ownership of a home, including whether the home was co-owned and, if so, how (state laws also affect the outcome).

Sole Owner
If the decedent was the only name on the home’s deed, the property generally will go through the probate process before passing to the beneficiary named in the will. If no will exists, the state’s intestate law will determine the outcome. In Illinois, for example, intestate law generally gives a surviving spouse half of the entire estate, with the other half going to the decedent’s children. In the absence of either a surviving spouse or children, the children or spouse respectively receive the entire estate. Parents, siblings and other relatives are also in the line of intestate succession.

Jointly Owned as a Married Couple
Married couples usually own their homes as joint tenants with right of survivorship. In other words, if one spouse dies, the surviving spouse receives the decedent’s share, even if the decedent designated a different beneficiary in his or her will. Probate is not necessary to trigger the transfer, but the surviving spouse will need to do some paperwork to make their sole ownership clear.

Note: Property is handled differently in — and among — community property states. For example, some community property states offer the option to hold community property with right to survivorship. Check with an appropriate professional if you live in a community property state.

Jointly Owned by an Unmarried Couple
Unmarried co-owners typically are treated as tenants in common. Upon the death of a co-owner, their share of the home generally will go to the named beneficiary in a will. This could, of course, be the surviving co-owner, but it also could be a different individual. In the absence of a will, the applicable intestate law will determine who receives the decedent’s share. Notably, intestate laws do not distribute assets to non-family members. If no family members exist, real estate generally becomes the property of the county where it is located.

Related Read: Real Estate and Divorce: Here is What You Need to Know

What are the Tax Implications?
Thanks to a concept known as “stepped up basis,” heirs generally can sell property immediately without recognizing capital gains. Under federal tax law, the tax basis in inherited assets “steps up” to their fair market value at the time of the owner’s death (or, if the executor elects, on an alternate valuation date six months after the death).

A surviving spouse also could benefit from the full $500,000 exclusion for the sale of a principal residence if the sale occurs within two years of the spouse’s death, assuming other requirements are satisfied. If more than two years have passed, the surviving spouse can exclude only $250,000 of any gain on the sale.

What about the estate tax? Assets properly bequeathed to a spouse qualify for the marital deduction and are not subject to the tax. Moreover, the estate exclusion (currently $12.92 million) means most estates escape the tax.

Estate Planning Can Preempt Problems
The best way to avoid unintended consequences related to the ownership of a home after death is to have a comprehensive estate plan in place. Whether through a will, a living trust, a transfer-at-death deed or another vehicle, you can protect your home for your loved ones and reduce the odds of a lengthy probate process or, even worse, court battle.

For more information, please contact Tammy Partridge. Visit ORBA.com to learn more about our Real Estate Group.

How to Make the Most of Current Opportunity Zone Investment Opportunities

Irina Heyer, CPA

In an attempt to spur investment and job creation in low-income communities, the Tax Cuts and Jobs Act of 2017 created Opportunity Zones across the country. While deadlines written into the legislation limit some of the potential benefits at this point, even taxpayers who invest now can enjoy some significant tax benefits.

Opportunity Zones in a Nutshell

The IRS defines “qualified opportunity zones” (QOZs) as economically distressed communities located in urban, rural, suburban and tribal areas where certain new investments are eligible for preferential tax treatment. More than 8,700 communities, including numerous in Cook County and other areas of Illinois, qualify. Depending on when you invested in a QOZ and how long you hold your investment, you can defer, reduce or even eliminate capital gains taxes.

To benefit, you need to invest “eligible gains” in a qualified opportunity fund (QOF) in exchange for an equity interest in the fund. QOFs are required to maintain at least 90% of their assets in QOZ property, including investments in QOZs businesses and new or substantially improved commercial buildings, equipment and multi-family complexes. QOFs can be corporations or partnerships. Eligibility and approval to become a QOF occurs when corporations or partnerships are filing Form 8996 with the entity’s federal income tax return.

Eligible gains include both capital gains and qualified Sec. 1231 gains (that is, gains from the sale of real or depreciable business property) that would be recognized for federal income tax purposes before 2027. Gains that arise from a transaction with a related person are not eligible.

You generally must invest the gains within 180 days of the sale that generated the eligible gain.

Related Read: IRS Proposes Regulations for Opportunity Zone Tax Incentives

The Capital Gains Tax Perks

The potential tax savings are substantial. For starters, you defer the gains you invest until the earlier of Dec. 31, 2026, or the occurrence of an inclusion event (for example, sales or gifts of your QOF interest or liquidation of the QOF). The amount of the deferred gain you will then include in your taxable income depends on: 1) The fair market value of your QOF investment on the date of the inclusion event; and 2) adjustments to the tax basis of that qualifying investment.

Reduction of Capital Gains
The longer you hold your QOF interest, the greater the tax benefits. If you hold it at least five years, your basis increases by 10% of the deferred gain, meaning you will only pay capital gains tax on 90% of the gain when it is taxed. If you hold your QOF investment for at least seven years, the basis increases by an additional 5% of the deferred gain, so you pay capital gains tax on only 85% of the gain.

Obviously, new investors have missed the window to enjoy the stepped-up basis benefits, but earlier investors can increase their benefits by holding onto their QOF investments until they reach the milestones above (assuming the milestones occur on or before Dec. 31, 2026). It is also not out of the question that Congress will extend the program. New investors may well benefit simply from deferring eligible gains for a few years.

Elimination of Capital Gains
Taxpayers who invest in a QOF at any time through Dec. 31, 2037, can enjoy tax-free appreciation on their investments. When you make the election to defer a gain by investing in a QOF, the tax basis in the investment becomes zero. However, if you hold your investment at least 10 years, you can permanently exclude the gain from the investment if you elect to increase the basis of the investment to its fair market value on the date of the sale or exchange.

Related Read: The Extended COVID-19 Qualified Opportunity Zone Relief Deadlines are Coming Due

Taking the First Tax Steps

In order to make sure that you are following the rules, consider all potential implications and file the appropriate paperwork. Consulting with tax advisors in qualified opportunity funds can be a first step in the investment process.

QOF Requirements

  • Must be organized as a corporation or partnership for the purpose of investing in QOZ property;
  • LLCs qualify if they choose to be treated as a partnership or corporation;
  • Submit Form 8997, “Initial and Annual Statement of Qualified Opportunity Fund Investments,”
  • To make the election to defer your eligible gain by filing IRS Form 8949, “Sales and Other Dispositions of Capital Assets,” for the taxable year in which the gains would otherwise be recognized;
  • Qualified Opportunity Funds are the required investment vehicle to invest in Opportunity Zones;
  • Investors have 180 days to invest a capital gain into a QOF that invests in QOZs; and
  • Opportunity Fund investments in real estate are subject to a substantial improvement or original use requirement.

Real Estate Requirements
Property that meets the qualification requirements for QOZs must have been acquired after December 31, 2017 and meet one of the two following requirements:

  • Substantial Improvement: A property is substantially improved when capital improvements in the 31-month period following the acquisition exceed the purchase price of the property, land value excluded; or
  • Original Use: The QOF must prove that it is the first to use a property during the property’s existence, or that the property has been vacant for more than one year, and is put to a commercial use.

For more information, contact your ORBA advisor. Visit ORBA.com to learn more about our Real Estate Group.

Forward Thinking