Tax basis help on $3M California residence inherited b/w trusts!

[Matt Dines]

Hi Forum,

I have a complicated tax situation and am looking for general guidance or a referral to a real estate accountant in California who can help answer.

Facts:

The property is a California residence appraised at $3M owned by the trusts of two now deceased great-grandparents, with execution of estate succession in progress. The property was titled and held in trust of the wife, passed away spring 2017. There was an inter-trust assignment of a 1/3 ownership in the property to the husband's trust (separate from the wife's). The majority 2/3 is thus owned by the wife's trust. The husband passed away winter 2017, and now there are two separate families working to come to a buyout agreement of the minority 1/3 interest and consolidate control with the wife's family trust.

The property was purchased in 1999 with an assessed value of $700k ($600k building, $100k land). As a going concern I believe those assessments would be interited under California law.

I estimate the property would generate net operating income of $100k ($120k gross, $20k opex).

Questions:

1. As is, would the depreciation expense be $21.8k per year? ($600k over 27.5 year asset life)

2. If we negotiated a sale of the 1/3 interest between trusts, could the basis of the property be stepped up to $3M for tax accounting?

3. If Yes on Question #2, how should the assessment values between land and building & improvements be established? Could we leave land value at $100k (under Prop 13) and step up the building and improvements to the remainder? (can dwelling be stepped up to $2.9M, increasing depreciation expense to $105k per annum over 27.5 year asset life?)

Help or referrals from the community are much appreciated!

[Marcy Moyer]

@Matt Dines. If the successor trustees were to just inherit the property and not sell to anyone I believe that the step up basis would be 3million and the property taxes would remain the same. The basis for the sale in the future would be 3 million dollars, the appraised value at time of death. Since 1/3 is being sold off, and the home is becoming a rental the situation is not straight forward. I can give you the name of a good tax accountant who is familiar with inheritance issues if you message me.