Heirs receive updated cost basis at time of death

Q. My father died last year and left his children his home under a life estate. We sold the home in June and were told by our attorney that if we sold the house within 12 months, our basis would equal the selling price and as a result, no capital gains tax would result. My question is, is there IRS documentation verifying this, and how do I report this sale on my personal tax return?

A. When you inherited the property you received a new stepped-up cost basis, value at the time of death or soon thereafter. That's why you have no taxable capital gains.

This might be a good year for using a tax professional.

Q. A recent column about what stays with the house reminded me of a story. Mom had intended to take the strawberry plants with them when they moved, but the purchaser's wife made such an admiring fuss about the plants that Mom was afraid that she couldn't take the plants, so she left them behind.

From what you wrote, it sounds like if the plants were not specifically discussed, Mom probably could have taken them with her. This is no longer an important question to me. Mom passed away in 2013, but it might be of interest to some of your readers

A. The question isn't whether items were discussed, but whether they're classified as personal or real property.

The law says annual plantings and harvestable crops requiring cultivation (fructus industriales) are generally considered personal property. That means a seller is allowed to take them. Uncultivated crops and perennial plantings like trees and bushes (fructus naturales) are considered part of the real estate and must be left.

Strawberry plants are perennial, but they do require some cultivation - beats me! My guess is that your mother was entitled to take the strawberries but not the plants.

Q. We want to buy a not-yet-built home in a new phase of an existing neighborhood. The builder says we selected the least expensive floor plan - ranch - but one of the most expensive lots, backed by trees. He wants us to sign a contract saying that we will pay the price he wants, even though it's $20,000 more that the appraised value of the finished home.

Is this legal? Moral? Normal?

Won't that mean we will be $20,000 in the hole financially? Upside down on the first day? Should we walk away from this deal? The homesite is located well for us, and the ranch floor plan is only offered by him - as one of five builders in this neighborhood.

A. There's certainly nothing illegal here. I haven't heard of government price controls since World War II. The builder is free to ask whatever he wants, and you're free to buy at that price or decide not to.

It doesn't sound as if there's anything immoral or abnormal here either. The builder is allowed to make whatever profit he can, and he evidently feels that desirable lot is worth the price.

In real estate, there are several different kinds of value, and you don't say where that "appraised value" comes from. I suspect you got it from your proposed fire insurance company. If so, you should understand that property insurance values are based on the cost of rebuilding after a loss. The figure would be the same no matter where your house was located, and it's not intended as an estimate of market value.

Q. For whatever reason, I never used my VA home loan and now, at age 66, I am wondering if I should use it to refinance. I currently have a 30-year fixed rate loan at 4.5 percent with a balance of $190,000.

I continue to receive numerous offers to refinance using my VA loan. Is it a wise move? If not, why?

A. The right to use a Veterans Affairs guaranteed mortgage does not expire. It did for a brief period when the World War II GI Bill ran out, but then it was reinstated and it's been available ever since.

For many veterans, the chance to buy with no down payment is the most attractive thing about a VA mortgage. As you'd be refinancing, that wouldn't concern you. With a VA loan, you wouldn't pay any mortgage insurance premiums, but you would have a funding fee, which could be paid upfront or added to the loan.

At this point, you should simply compare a VA mortgage with other options. Research closing costs on other refinance loans, interest rates and monthly charges. You may find you're best off just keeping your present loan, which already has a pretty good interest rate.

• Edith Lank will respond to questions sent to her at 240 Hemingway Drive, Rochester, N.Y. 14620 (include a stamped return envelope), or readers may email her through askedith.com.

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