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Real Estate Tax Problem – Part 3

In this third post of three, I go back to the problem caused by the death of an owner of real estate and the subsequent deaths of the next two people who were to inherit that property.  As I explained last week, A died in 1994 and her interest in her home passed by way of intestacy to her daughter, B.  When B died, by intestacy her share passed to her half brother, C.  C had a will leaving everything to his spouse.  By the time anyone realized that the fact the property was still in A’s name was a problem, they were about to close.

The title company which planned to issue a title insurance policy to the buyer was concerned about the issue of taxes, specifically estate and/or inheritance taxes.  If there remained any unpaid taxes then the title company could be on the hook if it issued a policy, which is why they required proof that either the taxes had been paid or there were none due.

Last week I explained that although there currently is no New Jersey estate tax, there was at the time that A, B and C died.  No estate tax was due, however, because in the case of A and B, their estates were small enough to be exempt.  In C’s case transfers to spouse are exempt from estate tax under what is called the marital deduction.

New Jersey inheritance tax, however, still exists and has remained unchanged for almost 40 years.  Spouses and children are exempt as Class A, however, siblings are Class C beneficiaries.  The tax rate is 15% of the first $700,000 a Class C beneficiary receives and 16% on anything above that amount.  The home sold for $375,000 so the 1/3 interest owned by A was worth $125,000.  One would think that the tax would then be 15% of that number.  Not so fast.

For one thing, the value of the home for tax purposes is the value at the date of B’s death 13 years ago.  Secondly, the return must be filed and the tax is due 8 months after death.  Interest accrues at 10% per year until paid.  Third, we had to establish what other assets existed that would also be subject to the tax as well as any outstanding debts and funeral expenses which might be used as a deduction to reduce the tax.

Given the number of years that have passed, it would take time to dig this information up.  In the meantime, the title company insisted that it hold an amount in escrow sufficient to cover the tax as a condition to allowing the closing now.    In the end we were able to help complete the transaction but it took several months to sort everything out.  The buyer could have walked away at any point but didn’t only because he was able to keep his promised mortgage rate despite now higher rates.

The takeaway is that as soon as you learn that an owner of real estate listed for sale has passed away, don’t wait for the title company to raise these issues.  Estate administration and tax issues are likely to take more than a few days to straighten out.