Kathy Schlegel
September 2022
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Daily News And Advice
Today's Feature Stories

Do You Pay Capital Gains on Inherited Property?

When you inherit anything, whether money, property, or something else, it can help you financially, and it’s a windfall. At the same time, inheritance can also make your taxes more difficult. If you inherit assets, such as property, you don’t typically owe taxes unless and until you sell them. Then, your capital gains taxes are calculated based on a stepped-up cost basis.

That means you pay taxes only on the appreciation once you inherit the property. If you’re selling an inherited property, you may need to work with a financial advisor.

Inheriting property doesn’t mean you automatically pay taxes. Three primary tax types apply to inheritance.

  • The first is inheritance taxes, which an heir would pay on the value of an inherited estate. There aren’t federal inheritance taxes. Only six states require you to pay any type of inheritance tax.
  • Then, there are estate taxes. These are paid out of the estate before anyone inherits from it. There’s a minimum threshold to pay estate taxes, which was $11.7 million in 2021, so it will not affect most people.
  • The one area of taxes that does affect people when they inherit something more often is capital gains taxes. These taxes are paid on asset appreciation for something you inherit through an estate. You’re responsible for these taxes only once you sell the asset for a gain, but not when you inherit it.

Stepped-Up Basis

If you inherit property, including real estate, the IRS uses a stepped-up basis for that asset. This means for purposes of your taxes, the base price of the asset rests on the value on the day you inherited it. You don't owe taxes if you inherit real estate and sell it immediately. Capital gains taxes are paid once you sell the property and only on the profit when you make the sale.

Two prices come into play when establishing capital gains taxes. First is the sales price. This is how much you sold the asset for. The original cost basis is how much you bought it for.

If you have real estate, this is different.

If your grandparents bought a house for $100,000 many years ago and now it’s worth $500,000, they would pay capital gains taxes for the $400,000 profit if they were to sell it.

If, instead, your grandparents passed away and left their house to you, the IRS considers the house’s original cost basis stepped up to the current market value. If you held the house for a year, and the price goes up during that year by 50,000, you owe capital gains only on that $50,000. Because of the stepped-up basis, it’s pretty rare for an heir to pay substantial taxes on an inheritance.

Capital gains taxes get very complicated, though, and it’s a good idea to work with a financial advisor if you’ve inherited property and then have sold it or plan to sell it.

You can avoid paying capital gains on inherited properties through different approaches and don’t automatically pay taxes on inherited properties.


A Guide to the Mortgage Interest Deduction

When you have a mortgage, there’s a deduction you can take on your taxes for the interest you pay on your first $1 million of debt. If you’re a homeowner who bought your home after December 15, 2017, you can deduct interest on the first $750,000 of your mortgage. If you are going to claim a mortgage interest deduction, you have to itemize your tax return.

The following is a guide to what to know about the mortgage interest deduction and how it works.

The Basics

The mortgage interest deduction lets you reduce taxable income by the amount you pay on the interest of your mortgage during the year. If you have a mortgage and keep up your records, you can lower your tax bill. Generally, as mentioned, you can deduct the interest paid on the initial $1 million of your mortgage for a primary or second home. For buyers who purchased after December 15, 2017, you can deduct what you paid on the first $750,000.

What Qualifies?

If you’re deducting mortgage interest for your primary home, typically, the following will count:

  • Your property can be a mobile home, house, apartment, condo, co-op, house trailer, or even a houseboat
  • Your home has to be the loan’s collateral.
  • The home needs to have sleeping, toilet, and cooking facilities.
  • If you get a housing allowance from the military or through the ministry that’s not taxable, you can still deduct the interest for a mortgage.
  • A mortgage you get to buy out the other half of your home in a divorce also counts.


If you have a mortgage on a second home, the following will qualify you:

  • You don’t need to use the home throughout the year
  • The house has to be the loan’s collateral
  • If you rent out your second home, you need to be there for the longer of at least 14 days or over 10% of the number of days you rented it out


Points are prepaid interest you can get on a loan. You can deduct your points gradually through the life of your loan, or if you meet certain requirements, you can deduct them at the same time. The eight requirements you have to meet to deduct your points all at once include:

  • The mortgage has to be for your primary home
  • It’s an established practice to pay points in your area
  • Your points can’t be abnormally high
  • Your points aren’t for closing costs
  • The down payment you make is higher than your points
  • The points are calculated as a percentage of your loan
  • The points are on your settlement statement
  • You use a cash method of accounting on your taxes


If you have a late payment charge that wasn’t for a specific service done in relation to your mortgage loan, you can deduct that. If you pay your mortgage early, you might have a prepayment penalty. You can deduct that penalty as interest.

You can deduct the interest if you have a home equity loan and use it to buy, substantially improve, or build a home. If you use the money for something not related to your home, it’s not deductible.

What’s Not Deductible?

Finally, the things that aren’t deductible include extra principal payments you make on your mortgage, homeowners’ insurance, title insurance, and settlement costs for the most part. Down payments, earnest money, or deposits you forfeit aren’t deductible or interest on a reverse mortgage.

To claim a mortgage interest deduction, start by looking for your Form 1098, which your lender sends in January or the start of February. Form 1098 outlines how much you paid in interest and points during the year. Your lender will send a copy to the IRS as well. If you paid at least $600 in mortgage interest, which includes points, you’d get a 1098.

You’ll need to itemize your taxes rather than taking the standard deduction when you complete your taxes.

When you itemize your taxes, it can take some more time, but if your standard deduction is lower than available itemized deductions, you should do it to save money anyway. You can use Schedule A to calculate deductions, and tax software will take you through the steps.


Will Homeowners’ Insurance Cover Natural Disasters?

We’ve been hearing about a lot of natural disasters around the country lately, which are fairly common during the summer months and even year-round. No one ever thinks they’ll be impacted by a natural disaster, but it does happen. Unfortunately, if you aren’t prepared, you might be facing a lack of insurance coverage to repair or rebuild your home.

Your homeowners' insurance is something that can, in some cases, protect you against extreme natural disasters, but not always. Knowing what your coverage excludes is important.

What Doesn’t Homeowners’ Insurance Cover?

While every policy and company can be different, it’s likely that your homeowners' insurance excludes flooding and earth movements. Depending on where your home is, you might also have limited coverage for hail damage.

Flood damage and mudflows are very often excluded from homeowners insurance. That means you need to go through the National Flood Insurance Program (NFIP) to get a flood insurance policy. This is a federal program that researches flood damage in the U.S. and then works with private insurance to provide flood insurance that’s federally sponsored. There’s typically a 30-day waiting period for flood insurance, so you should think about buying a policy before the peak of flood season.

Most homeowners policies don’t include damage from earthquakes or sinkholes either. You might see these exclusions referred to as damage caused by the movement of the earth. It can also include landslides and mudslides.

Depending on where you live, you could need separate sinkhole or earthquake insurance. Some states have insurance for landslides and mudslides, particularly on the west coast. The policies can be expensive, though.

Your home insurance policy probably protects you against hail damage unless you live somewhere hail storms are especially prevalent, like the Great Plains states. In these places, you might have a higher deductible for hail damage, or the insurance company could restrict payments for hail-induced cosmetic damage. You might be unable to file a claim unless the hail causes structural damage.

What About Tornadoes?

Spring and summer are a time when we tend to see a fair amount of tornadoes, but luckily, most standard homeowners insurance policies do cover damage from these storms. For the purposes of insurance, wind damage stemming from tornadoes isn’t distinct from the damage that comes from smaller gusts. If you live somewhere that’s especially vulnerable to tornadoes, insurance might get a bit trickier.

For example, in Oklahoma or Texas, insurance companies can charge separate deductibles for claims related to wind instead of the all-perils deductible. Wind deductibles may be a flat amount, but more commonly, it’s a percentage of your total property coverage.

If you live somewhere prone to tornadoes and strong storms, you might consider whether you have enough coverage to allow you to rebuild if you suffer a complete loss. For example, your homeowners' insurance may cover tornadoes but only the depreciated value of your home and property, as compared to the full value.

If you have homeowners insurance that only covers the depreciated value or actual cash value of your home, you might think about upgrading to replacement cost coverage. This is a reimbursement structure that doesn’t take into account depreciation, so it may facilitate you being able to rebuild your home back to the way it was before your loss.

Are Hurricanes Covered?

Your homeowners' insurance may partially cover hurricane damage, but flood damage from a hurricane is almost always excluded. If a hurricane destroys your house, your insurance company determines if the destruction was from the wind or due to a storm surge before they compensate you. If you live somewhere that gets a lot of hurricanes, you should think seriously about getting flood insurance.

Once you experience a natural disaster, the compensation you get from the insurance company depends on your coverage. Your dwelling coverage comes in three types. There’s actual cash value, replacement cost value, and extended or guaranteed value.

Finally, if you want to make sure you receive compensation for your home’s full value, you need to purchase extended replacement value. This coverage makes sure that if something comes up in rebuilding your home and it exceeds your policy limit, you’re still compensated.


What Exactly is a HELOC?

The mortgage industry really isn't very different compared to others as it relates to industry jargon. HELOC is one of those bits of jargon. What exactly is a HELOC? We'll explain.

There are different ways to tap into home equity. A common one is a cash out refinance. When someone refinances a loan due to a lower rate, shorter or longer term or part of the process to take someone off the title to the home. When refinancing an existing mortgage, the borrowers can choose to also pull some of that equity out during the process. Refinancing in order to just take out some equity isn't the best strategy. 

A refinance is still a new mortgage. It replaces an existing loan with a new one. Because it's a new mortgage, there will also be a host of new closing costs needed in order to follow through with the refinance. This is why refinancing for the sole purpose of tapping into home equity doesn't make sense. A HELOC, however, can.

HELOC is the acronym for Home Equity Line of Credit. Okay, so how does a HELOC work in practice? A HELOC typically comes in the form of a second mortgage, meaning it takes a subordinate role to an existing first mortgage. When the home is sold, the new mortgage pays off the existing first mortgage and the next payoff is the second mortgage. Due to this secondary position, it's possible, although relatively rare, there won't be enough funds to cover both the first and the second. 

But a HELOC is not simply a second mortgage. Instead, it's a line of credit. This means someone can borrow some or all of the limit and pay it back over time at their leisure. Most HELOCs do however require borrowers to take out a minimum amount as well as make minimum payments at some point. 

The lender will lay out all the terms of the second lien. If a HELOC carries a $25,000 credit line, the borrowers might decide to pull out maybe $5,000. The borrowers can then pay down the balance minimum or pay more. A HELOC can be used over and over again, just like a credit card. Make a charge, then have the option of paying the minimum, a little more than the minimum or the entire outstanding balance.

Most HELOCs work like any other, it's just the individual lender that sets the terms.


Halloween Decorating and Marketing Tips For Selling Your House

Planning to deck your house out with ghosts and skeletons and every last one of the pumpkins and gourds in your supermarket’s produce department? If you’re also planning to sell your home, you might want to rethink that strategy.

There are mixed opinions on how much to decorate for Halloween—or if you should at all—when selling your home. Can it actually help you sell a home if you turn the holiday into a marketing opportunity? Possibly. We took the temperate of the industry FULL STORY->

What are the Pros and Cons of a HELOC?

A home equity line of credit is a type of financing that pulls value from your home.

You’re accessing your equity, and some of the reasons you might tap into it include:

• Home improvements
• Debt consolidation
• Long-term investments
• Emergency expenses
• Business expenses

Home improvement is largely the main reason people get HELOCs. You can upgrade your home or make it more functional for your needs. You FULL STORY->

Hybrid Loans: What They Are and How They Work

Different industries share common industry jargon and the mortgage business is no different. Balloons, non-owner and investment properties just to name a few. On a daily basis, loan officers use various terms regularly. 

So much so that many times a loan officer will begin to use these terms when speaking directly with a borrower. The problem is, that while the loan officer knows exactly what the terms are the borrower typically has no clue. One of these terms we'll talk about FULL STORY->

Ask The HOA Expert: Policies To Exclude Certain Categories Of Dogs

Question: Can the board enact a policy to exclude certain categories of dogs that are perceived to be dangerous such as rottweilers or pit bulls?

Answer: The board has the authority to make rules but should not do so without feedback from the members. This is especially true of pet issues which are among the most sensitive HOA topics. However, the board does have a responsibility to establish reasonable rules to protect the residents while in the common area from dangerous FULL STORY->

7 Tips for Negotiating a Commercial Lease

If you’re renting a commercial or retail space, whatever a potential landlord provides you is ultimately a rough draft. This isn’t the same as a residential rental agreement because, in a commercial lease, it’s expected that you’ll go through several rounds of negotiations. It’s common for tenants to request changes to make sure they’re getting a contract that meets their needs.

With that in mind, the following are seven tips you can use to negotiate a commercial lease FULL STORY->

Mortgage Rates
Averages as of September 2022:

30 yr. fixed: 5.55%
15 yr. fixed: 4.85%
5/1 yr. adj: 4.36%

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Kathy Schlegel, Marin Realtor of the Year; Past President Marin Assoc. of REALTORS®
Golden Gate Sotheby's International
902 Irwin Street
San Rafael, CA 94901

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