Adjusted Cost Basis Calculation

Inheriting properties through a trust can be a complicated and overwhelming process. Not only are there emotional considerations, but there are also financial and tax implications to consider. One important aspect to understand is the Adjusted Cost Basis (ACB) and how it affects your taxes when selling inherited properties. In this blog post, we will discuss the calculation of ACB and what expenses can be considered as improvement or selling costs.

Understanding Adjusted Cost Basis (ACB)

Before we dive into what expenses can be considered when calculating ACB, let's first understand what ACB means. ACB is the value of an asset for tax purposes. It is used to determine the capital gains or losses when selling an asset. In the case of inherited properties, the ACB is calculated based on the Stepped Up Cost Basis or the Date-of-Death Appraisal, plus any improvement costs and selling costs.

Stepped Up Cost Basis refers to the fair market value of the property at the time of the owner's death. This value is typically determined by a professional appraisal. Date-of-Death Appraisal, on the other hand, is the fair market value of the property at the time of the owner's death as determined by the executor of the estate. In most cases, the Stepped Up Cost Basis is used as it is more accurate and can help reduce the tax burden.

Now, let's take a look at what expenses can be considered as improvement costs or selling costs when calculating ACB.

Allowable Improvement Costs

Improvement costs refer to any expenses incurred to improve the property's value. These expenses can be added to the ACB and can help reduce the capital gains when the property is sold. Some examples of allowable improvement costs are renovations, additions, and upgrades that increase the property's value. In the case of inherited properties, there may be some unique situations where expenses may also be considered as improvement costs. Let's take a look at some examples:

• Appraisal costs can be considered as improvement costs if they were incurred to determine the fair market value of the property at the time of the owner's death. This cost can be added to the Stepped Up Cost Basis when calculating ACB.
• Replacing a hot water heater that broke down during the trust administration period can be considered as an improvement cost if it was necessary to make the property market-ready. However, if the hot water heater was already in poor condition before the trust administration period, it may be considered a repair cost instead. In that case, it cannot be added to the ACB.
• Updating faucets can be considered as an improvement cost if it increases the property's value. However, if it was simply to replace old or damaged faucets, it may not be considered an improvement cost.
• Reconstructing the base of a walk-in shower to make it more accessible for someone with a walker can be considered as an improvement cost. This expense can be added to the ACB as it increases the property's value.
• Steam cleaning carpets can be considered as an improvement cost if it is done to increase the property's value. However, if it was simply done as part of regular maintenance, it may not be considered an improvement cost.
• Special landscaping to improve curbside appeal can be considered as an improvement cost. This type of improvement can increase the property's value and can be added to the ACB.

Allowable Selling Costs

Selling costs refer to any expenses incurred to sell the property. These expenses can also be added to the ACB and can help reduce the capital gains when the property is sold. Some examples of allowable selling costs are real estate agent fees, advertising fees, and legal fees related to the sale. In the case of inherited properties, there may be some unique situations where expenses may also be considered as selling costs. Let's take a look at some examples:

• Sellers title insurance can be considered as a selling cost if it was paid before the closing of the sale. This expense can be added to the ACB and can help reduce the capital gains when the property is sold.
• Junk hauling, hiring an estate sale company, and cleaning services can all be considered as selling costs. These expenses are directly related to the sale of the property and can be added to the ACB.
• Cleanup and boarding up after vandalism can also be considered as a selling cost. This type of expense is necessary for the sale of the property and can be added to the ACB.
• Patching a leaking roof during the trust administration period can be considered as a selling cost. This expense is necessary to make the property market-ready and can be added to the ACB.

It's important to note that not all expenses incurred during the trust administration period can be considered as improvement or selling costs. Only expenses that increase the property's value or are necessary for the sale of the property can be added to the ACB. It's best to consult with a tax advisor to determine which expenses are allowable for your specific situation.

Final Thoughts

Inheriting properties through a trust can be a complicated process, especially when it comes to taxes. Understanding the calculation of ACB and which expenses can be considered as improvement or selling costs is crucial for reducing the tax burden when selling inherited properties. It's best to consult with a tax advisor for guidance. By taking the time to properly calculate ACB and claim allowable expenses, you can minimize your tax liability and maximize your inheritance.