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When realty owner dies, forget capital gains

DEAR BOB: Recent comments about "stepped-up basis" after the real estate owner dies reminded me of when I served as executor of an estate. The decedent left her four-unit apartment building, in which she occupied one apartment, to a niece who resided abroad and did not speak English. It was my understanding that if the estate sold the property, capital gains tax would be owed. Therefore, I arranged to distribute the building to the niece. She took title momentarily and then sold the building to a buyer, thus avoiding capital gains tax. Was this the correct way to handle the situation? _ Ewald S.

DEAR EWALD: What you did was fine; however, after a property owner dies, capital gains taxes become irrelevant.

When a real estate owner dies, their property is valued at its market value on the date of death or alternate valuation date selected by the estate. That is called the "stepped-up basis." This amount is used to determine the property's valuation for federal estate tax purposes.

For example, suppose the decedent has a $100,000 adjusted cost basis for a property but on the date of death, that property is worth $300,000. For estate tax purposes, it is valued at a stepped-up basis of $300,000. The estate can then sell the property for $300,000 and distribute the proceeds to the heir without capital gains tax being due. Or, as you did, the property can be distributed to the heir with a $300,000 stepped-up basis, and she can sell it for $300,000 with no tax due because there is no profit.

The net result is Uncle Sam forgets about capital gains taxes after the real estate owner dies. At that point, he becomes interested in possible estate taxes. If the decedent dies in 2000, estates with net values below $675,000 are free of federal estate taxes. For more details, consult a tax adviser.

DEAR BOB: Last year I inherited 50 percent of a house from my late uncle. He co-owned and lived in the house with his male partner for at least 15 years. That partner is a nice man who doesn't want to sell the house or buy me out. Frankly, this man is bitter at my deceased uncle for not willing him the other half of the house, which is worth at least $400,000. I offered to sell my half of the house to this man for $200,000, but he refuses to cooperate. It is free-and-clear. How can I sell my half of the house? _ Julie R.

DEAR JULIE: There isn't much resale market for half of a house. I presume you have no desire to move into the house; however, you can force its sale by bringing a partition lawsuit against your co-owner.

But before doing that, I suggest you, or your local real estate attorney, write a polite letter to your co-owner explaining the alternatives. If you are in a financial position to do so, you can quit claim deed your half of the house to the other owner in return for a mortgage of a suitable amount and interest rate with monthly payments to you. Or, if you want cash, you can suggest your co-owner obtain a 50 percent mortgage to buy you out.

_ Tribune Media Services