Net Worth of Property vs. Gross Value of Property
The term “gross value of property” refers to the value of assets and property before subtracting taxes and debts. Property tax is based on the net worth of the property – the amount remaining after deducting all available deductions, credits, and settling liabilities.
Liabilities
Liabilities related to the property are debts owed by the deceased, such as credit card balances and mortgages. Costs incurred in handling the estate, as well as state-level property taxes, can be deducted when calculating federal-level taxes. Gifts made to charities and the value of assets transferred to a spouse can also be deducted.
Assets
Assets in the estate include real estate fully owned by the deceased, as well as those in which the deceased only has a share of the capital. This may be the case for property jointly owned with a spouse. In this case, 50% of the property value will be allocable to the deceased’s estate. Assets subject to legal documentation are included in the net calculation, along with assets held in revocable living trusts. Assets held in irrevocable trusts are not considered part of the deceased’s estate for tax purposes.
Federal Estate Taxes vs. State Estate Taxes
Deductions, credits, and exemptions available can vary between federal estate taxes and state estate taxes. As of 2021, twelve states and the District of Columbia impose estate tax. There are also seven states that impose a “death tax” that is similar (but different). Maryland imposes estate tax and inheritance tax.
Property Tax Rates
The rates of taxes paid on property function in the same way as income tax rates. A specific rate applies to the portion of value that falls within a certain range.
Valuation Dates
The Internal Revenue Code provides two valuation dates: the date of death or the alternate valuation date. The date used to value the estate can have significant effects on estate tax liability.
Estate Valuation on Date of Death
Estate valuation on the date of death refers to the fair market value of each asset in the estate at the time of the deceased’s death. This includes values as of that date for bank, investment, and retirement accounts.
Alternate Valuation Date
The value of the alternate valuation date is the fair market value of all assets included in the total estate of the deceased six months after the date of death. The personal representative, executor, or administrator of the estate is allowed to choose to use either date of death values or alternate valuation date values if the estate is significant enough to be subject to federal estate taxes.
Using the Same Valuation Date for All Assets
All estate assets must be valued on the alternate date if this option is chosen, not just those that have decreased in value. The executor cannot use date of death values for some assets and alternate valuation date values for others. Some assets may appreciate during the six months, potentially eliminating any reduction in total estate value achieved by declining assets.
Impact of Date on Capital Gains
Another potential effect of using the alternate valuation date is its impact on the stepped-up basis received by beneficiaries for capital gains tax purposes. The beneficiary’s basis in assets is either the date of death value or the alternate valuation date value, whichever is chosen when settling the estate.
Frequently Asked Questions
When is estate tax refund due?
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IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, must be filed with the federal tax authority within nine months of the date of death unless an extension is requested. The return estimates the value of the estate as of the date of death.
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Can an assessment be made for an interest-bearing account?
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Contact the banking or investment institution for a valuation as of the date of death for an interest-bearing account. The final statement may not be accurate enough as of the date of death.
Source: https://www.thebalancemoney.com/what-value-of-an-asset-is-used-for-estate-tax-purposes-3505646
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