E.g., I own a rental property. I plan to sell the property upon or soon after the projected death-date of my spouse. (She is more than ten years older than me.) Pralana Gold shows a substantial LTCG and deprecation recapture which, I believe, should be much smaller due to the step-up in basis to Fair Market Value.
Note, in my case, I live in a community property state, so the entire rental property should receive a step-up in basis upon the death of my spouse.
Similarly, a taxable brokerage account should also receive a step up in basis upon the death of a spouse.
I asked for this some time back too.
But we're assuming it's simple and I don't know if that's accurate. I'm no lawyer, but a little reading showed it can be different in community property vs. other states, and depending on whether the assets were commingled, held in a trust, etc. Interestingly, I saw that carryover losses (which 2022 gave me plenty of ???? ) can all be used up, without getting cut in half, even after a spouse dies, if done in the same year. So an alert surviving spouse should gain harvest (sell and instantly re-buy) to use up the losses so they don't get cut in half.
It would be a research project for Stuart and Charlie to see if it would be doable to provide a way for the user to select whether to do a step-up basis on various assets. If it's doable, it would be another differentiator between Pralana and other products.
Thanks, Richard.
I noodled over this a little bit, and I think one way to handle the issue (for rental properties, at least) may be to indicate the closing costs at 100%, which would create a phantom step-up in basis. In other words, no gain or recapture will be realized. Then, on the income page, indicate non-taxable income for the same amount (i.e., total sale amount) in the same year as the sale of the rental property. I have yet to test this out, but I think it should work.
I think this would work for community property states. For others, where there is only a half step-up in basis upon death of the first spouse, this would not be so easy, since indicating a corresponding 50% non-taxable income would only cause the long-term capital gain and deprecation recapture to be allocated entirely to the half that has not had its basis stepped-up in this phantom fashion.
I don't think there is anything similar (i.e., indication of percentage closing costs) available for stock sales.
In looking at this further, for stock sales in community property states, one might be able to create an asset class that is never taxed (this assumes there are no withdrawals prior to death of the first spouse to die) by indicating (on the Asset Class Taxation tab under Financial Assets) that "Growth is Tax-Free." This would approximate the full step-up in basis, so long as the assets are sold soon after the step-up event.
Again, not something I've tried, but I think it may work.
Alan and Rick, I think this would be a worthy enhancement for the tool and I'm adding it to our list for Pralana Online (probably for next year as we're already max'ed out for this year. In the meantime, hopefully your ideas for approximating the step-up in basis will be adequate.
Stuart
Is there an update on this one? I am in California, and I want to make sure that my tax projections reflect a step-up in basis on our brokerage account.
It would be a research project for Stuart and Charlie to see if it would be doable to provide a way for the user to select whether to do a step-up basis on various assets. If it's doable, it would be another differentiator between Pralana and other products.
If I understand your suggestion, users would have the ability with most assets (real estate, equities, bonds etc) to reset the basis for that asset held in a taxable account. Due to the complexity, users would do the research on their own on the details of exactly how much (fed and state), the program would simply make the adjustment the user stated henceforth (which would affect misc optimization runs).
Were you thinking of only "after death of spouse" opportunity or more general case? If going beyond real estate, users would want the ability to reset a portion of the asset, and to either sell with the reset basis or rebuy the same asset (gain harvest)-- all of which which sounds very complicated to me.
Frankly I can see why no retail product incorporates basis. But this discussion has caused me to wonder a more fundamental question: Given the difficulty of implementing step-up, is the Roth conversion optimization as it exists valid (that is: is it "good enough") to model any scenario with a spouse living some years past the other, and which includes major amount of taxable assets, including real estate? In other words, can stepped up bases be ignored?
The feature request was to handle the step up in cost basis when one spouse passes. It was added to Online a few months back. It varies by state-in community property states, the surviving spouse gets a full step up, in other states, it's half. Look at Review-Balance sheet. I did not check to see if it handles real property or just your taxable account.
This is great! Is there a way to model withdrawing a large sum (or percentage) right after the cost-basis step-up but before another year of unrealized gains is accumulated? I've tried several methods (enter the amount as an expense in the year of, or following, the death of first spouse, and/oror enter the amount as a scheduled withdrawal), but either way it there is a capital gains tax imposed, either on the full amount withdrawn or on one year of gains that are withdrawn..
I plan to give away all taxable assets right after cost-basis step-up (100% in CA). I can do model this as a scheduled withdrawal to an external account. However, this distorts the operation of the Roth Conversion Optimizer, since it only considers terminal value and doesn't see the cost of using taxable funds to pay for the tax on Roth conversions, if the taxable balance is subsequently removed from the model. What is the best way to model this? I'm thinking if I transfer out a fixed sum, then the correct incentive will be preserved, would this be correct?
