Am I Paying Too Much Real Estate Tax on my Delaware County Home

Determining If Your Assessed Value Is Too High

First, look up your property’s current real estate tax assessment on the Delaware County Property Public Access website located at http://delcorealestate.co.delaware.pa.us/pt/forms/htmlframe.aspx?mode=content/home.htm then enter your Parcel ID Number or address to get your assessed value.  You can also find the assessed value on your property tax bill.

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Beginning this year Delaware County has moved to taxing 100% of the assessed value. Therefore, you need to compare the current fair market value to the current real estate tax assessment you just located on the Delaware County website above. If the current assessed value is higher than the current fair market value you should hire the law Offices of Spadea & Associates, LLC by July 26, 2020 to file an annual Real Estate Tax Assessment Appeal is September 1, 2020.

Fees Involved

If you purchased the property after September 1, 2019 and have a HUD-1 settlement sheet (that is less than 12 months old) you can use the sales price from the HUD-1 as the Fair Market Value, and do not need an appraisal.  However, if you bought the property at a short sale or foreclosure, or bought it more than a year ago, you must have an Appraisal to appeal the property tax assessment.  The Cost of an Appraisal is about $400.  The filing fee is typically $50 and is made payable to “Delaware County Treasurer” but is waived this year.  The Law Offices of Spadea & Associates, LLC will help you file the application and attend the hearing on your behalf in late September.  You pay us nothing if we are unable to reduce your assessment.  There are two types of assessment appeals, one is the annual appeal and the other is the interim assessment appeal. 

Annual Appeals

The annual appeal allows property owners to appeal their assessment once a year.  Annual appeals must be filed by August 1 of each year.  Remember, in the case of an annual appeal, the Board decision does not take effect until tax bills are issued the following tax year.  The Law Offices of Spadea & Associates, LLC will represent you at the hearing which is typically in late September and present evidence such as a recent appraisal with pictures.  The Board will determine the current fair market value for the property based on the appraisal and settlement sheet presented at the hearing.  The Board generally renders a decision within 10 weeks of the hearing date and notifies the property owner in writing.  Normally the hearings are held in late September.  If you do not agree with the Board’s findings you have the right to file an appeal within 30 days to the Court of Common Pleas. 

Interim Assessment Appeals

The interim assessment represents the value difference (increase) attributable to any assessable improvement to the land and the resulting increase in land value, if any. Assessable improvements include, but are not limited to; new construction of a primary structure or the addition to any such structure and the construction of any ancillary, contributory improvements such as swimming pools, sheds, garages, etc.

If a property is subject to an interim assessment, a property owner will receive an “Interim Real Estate Assessment Notice.” This Notice will inform the property owner of the old assessment and new assessment. The bottom portion of the Notice contains an APPEAL REQUEST FORM. In order to perfect an appeal of an Interim Assessment, the property owner must return the bottom portion of the Interim Notice to the Assessment Office to request receipt of an Appeal Application within forty (40) days of the date of notification of the assessment change.  The appeal date will be noted on the Interim Real Estate Assessment Appeal Notice at the top right and bottom right or this notice.

To file either an interim or annual appeal, contact Gregory J. Spadea at the Law Offices of Spadea & Associates, LLC in Ridley Park, Pennsylvania at 610-521-0604.

Understanding The Tax Rules Relating to Personal Use of Vacation Homes

Understanding the Tax Rules Relating to Personal Use of Vacation Homes

There are three basic rules for treating expenses and income in connection with vacation homes. It all depends on the number of days the home is rented versus the days that it is used for personal purposes.

1) When the personal use of the vacation home exceeds the greater of 14 days or 10% of the days it is actually rented all the expenses are only deductible to the extent of rental income. For example repairs, utilities, insurance, depreciation, and so on are deductible only to the extent of gross income less mortgage interest and property taxes attributable to rental use. However, you cannot claim a loss on the rental, while net income in excess of expenses is taxable.

Gregory Speadea Attorney TAx Lawyer article on Vacation Home

2) When the vacation home is rented out for less than 15 days during the year, there are no tax ramifications. In other words, you don’t recognize rental income or deduct rental expenses.

For example, say you rent a beach house in Ocean City. You and your family use the beach house most of the summer. Then you rent out the place the two weeks after Labor Day. In effect, all of the rental income is tax-free.

Note: You still can claim those itemized deductions you would be entitled to if you did not receive any rental income. This includes mortgage interest limited to all mortgages up to $1,000,000, used to buy, construct, or improve your first home and second home for tax years prior to 2018. Beginning in 2018, this mortgage limit is lowered to $750,000. In addition, for tax years beginning in 2018 there is a $10,000 deduction limit for state and local income taxes and real property taxes.

3) When your personal use of the home does not exceed the greater of 14 days or 10% of the days the vacation home is rented out, the above limits do not apply. All expenses attributable to the rental are deductible – even if you show a loss. However the amount of the loss may be limited by the passive loss rules.

What constitutes a “personal use day” for these purposes? Any day that the home is used by an owner of the family (or family member), someone who pays less than a fair market rental or someone who uses the home under a barter or exchange agreement-even if a fair rental is paid. The amount of time spent at the vacation home doesn’t matter. For instance, if you use the home for just one hour, the whole day is considered a personal use day.

However, a day will not count as a personal day if you spend the time cleaning up or fixing up the place. And that’s true if even if the rest of the family comes along just for the ride.

How do the passive loss rules affect things? In general, losses from so-called passive activities can only be used to offset income from passive activities. The rental activity of your vacation home, by its very nature, will be considered a passive activity.

But there’s still a way to get around the rules. If you “actively participate” in the rental activity, you can use up to $25,000 of loss to offset non-passive income, such as wages and portfolio income. The $25,000 offset is available in full if your adjusted gross income (AGI) is below $100,000. It is phased out until it completely disappears for an AGI above $150,000.

What constitutes active participation? The requirement can be satisfied by regular, continuous and substantial involvement in the rental activity. Examples: participation in management decisions such as approving new tenants, scheduling or supervising repairs, deciding on rental terms, etc. In order to qualify under this exception, you must own at least a 10% interest in the property. Please refer to my blog Understanding What A Real Estate Professional is Under the Passive Activity Loss Rules.

Remember the passive activity loss rules do not come into play at all if your personal use exceeds the 14 days or 10% of the days rented because you cannot deduct the rental loss. If you have any questions contact Gregory J. Spadea at 610-521-0604.

Understanding What a Real Estate Professional Is under The Passive Activity Loss Rules

Because of the potential increased focus on the audit of returns showing rental real estate losses, it is important to understand when Landlords are entitled to deduct losses from rental real estate as ordinary losses rather than having to treat such losses as passive.

To escape passive-loss classification, the Landlord must qualify as a “real estate professional” and must materially participate in the rental activity. Keep in mind this is not the only way to avoid passive loss. There is also the exception for up to $25,000 of losses of an active participant in a rental real estate activity under 469(i). Section 469(c)(7)(B) requires that a Landlord meet two tests in order to be considered a real-estate professional for a taxable year. Those tests are:

  1. The Landlord must show that more than one-half of the personal services performed by him in trades or businesses were performed in real property trades or businesses in which he materially participated; and
  2. The Landlord must show that he worked more than 750 hours in real property trades or businesses in which he materially participated.
For Rent sign in front of new house

The first test becomes an issue only if the Landlord is involved in another occupation in addition to real estate.  The courts in deciding the issue of “real estate professional” have not expressly dealt with this test; rather, they use the fact that the Landlord spent time in an occupation outside of real estate to buttress their conclusions that Landlord has not met the 750-hour test.

I always recommend that Landlords keep contemporaneous time logs, time reports or calendars that they can input manually into a day timer or type into a google calendar.   The log or calendar should provide a detailed account of what the Landlord did with respect to an activity, when he did it, and how much time it took. 

Rental services that qualify for meeting the 750 hour annual requirement includes, but is not limited to:

  1. Advertising to rent or lease the real estate;
  2. Negotiating and executing leases;
  3. Verifying information contained in prospective tenant applications;
  4. Collection of rent;
  5. Daily operation and management;
  6. Maintenance and repair of the property, including the purchase of materials and supplies;
  7. Supervision of employees and independent contractors.

It is a common misconception, however, that qualifying as a real estate professional makes the Landlord’s rental activities nonpassive. This is not the case; rather, a Landlord who qualifies as a real estate professional has merely overcome the presumption that all rental activities are passive regardless of level of participation. For the real estate professional’s rental activities to become nonpassive activities, the Landlord must establish that he or she has met the material-participation standard with regard to the rental activities.  Only those rental activities in which the real estate professional materially participates are nonpassive activities.

Importantly, the statute provides that a qualifying real estate professional must establish material participation in each separate rental activity. An exception is provided, however, by which the Landlord may elect to aggregate all interests in rental real estate for purposes of measuring material participation.  The landlord can elect to treat all rental properties as a single rental activity by filing a statement with his original income tax return for the taxable year.  Merely aggregating rental income and expenses on Schedule E does not suffice.  Without an election, the Landlord must examine each rental property to determine whether he materially participated in the rental of that property.

Material Participation

Material participation is determined under the seven tests set forth in Treasury Regulation § 1.469-5T. To prove “material participation,” the Regulation allows grouping real-property trades or businesses based upon facts and circumstances. The regulation lists 11 types of real property trades or businesses: real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage. However, rental activities cannot be grouped with other real-property trades or businesses.  The seven tests are: 

  1. The individual participates in the activity for more than 500 hours during the tax year.
  2. The individual’s participation in the activity for the tax year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for the year;
  3. The individual participates in the activity for more than 100 hours during the tax year, and the individual’s participation in the activity for the tax year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for the year;
  4. The activity is a significant participation activity for the tax year, and the individual’s aggregate participation in all significant participation activities during the year exceeds 500 hours;
  5. The individual materially participated in the activity for any five tax years whether or not consecutive, during the 10 tax years that immediately precede the tax year;
  6. The activity is a personal service activity, and the individual materially participated in the activity for any three tax years whether or not consecutive preceding the tax year;
  7. Based on all of the facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during the year.

There are several important considerations when measuring material participation in a Landlord’s real property trade or business.  First, hours spent as an employee are not counted unless the employee is a 5% owner in the employer. Second hours spent as an investor in a real property trade or business such as studying and reviewing financial statements, preparing summaries of the finances or operations, or managing the finances of an activity in a nonmanagerial capacity are not counted toward material participation unless the Landlord is directly involved in the day-to-day management of the business.

In addition, if the individual holds an interest in a real property trade or business through a limited partnership interest, the individual may establish material participation only by satisfying the first, fifth, or sixth tests of the seven tests from the regulations described above.

When measuring material participation, an individual taxpayer is required to count any hours performed by his or her spouse, even if the spouse does not own an interest in the business or if no joint return is filed.  While this rule is advantageous because it makes it more likely the taxpayer materially participates in the real property trade or business, it is a trap for the unwary in the real estate professional context.

The relevant case history has established that it is very difficult for a Landlord who has a full-time job that is not in a real property trade or business to satisfy this first 50% test. The IRS and the courts find it dubious when a Landlord who works 2,000 hours a year at a non-real estate job purports to have spent more time on his or her real estate activities.

If you have any questions about material participation or being a real estate professional call Gregory J. Spadea at 610-521-0604.    

What Every Landlord and Tenant Should Know About the Implied Warranty of Habitability

What Landlords and Tenants Need to Know about the Implied Warranty of Habitability

 

The Pennsylvania Supreme Court has ensured that tenants have the right to a decent place to live.  This guarantee to decent rental housing is called the implied Warranty of Habitability.

 

The Warranty means that in every residential lease in Pennsylvania whether oral or written, there is a promise (the Warranty) that a landlord will provide a home that is safe, sanitary, and healthful.  A rental home must be safe to live in and the landlord must keep it that way throughout the rental period by making necessary repairs.  Even if the renter signs a lease to take the dwelling “as is”, the Warranty protects the individual.  The right to a livable home cannot be waived in the lease.  Remember, the Warranty is in the lease, whether or not the lease says so.  Any lease clause attempting to waive this Warranty is unenforceable.

 

The Warranty does not require the landlord to make cosmetic repairs.  For example, the landlord is not required to repair faded paint, install new carpeting, or make other cosmetic upgrades or improvements.  However, the landlord must remedy serious defects affecting the safety or the ability to live in the rental unit.

 

The following are examples of defects covered by the Implied Warranty of Habitability:

 

  • Lack of hot and/or cold running water
  • Defunct sewage system
  • No ability to secure the leased premises with locks (doors, windows)
  • Lack of adequate heat in winter
  • Insect or rodent infestation
  • Leaking roof
  • Unsafe doors, stairs, porches and handrails
  • Inadequate electrical wiring (fire hazard) or lack of electricity
  • Inability to store food safely because of broken refrigeration unit (when the landlord is responsible for maintenance and repair of refrigerator in the lease)
  • Unsafe structural component that makes it dangerous to occupy the premise

 

If you are a tenant living in leased premises that have any of the defects listed above you have the following legal rights after you have complied with the notice requirements of the lease:

  1. the right to withhold rent until repairs are made, or
  2. the right to “repair and deduct”—that is, to hire a repairperson to fix a serious defect that makes a unit unfit (or buy a replacement part or item and do it yourself) and deduct the cost from your rent.

If you have any questions or need a landlord tenant lawyer, please call Gregory J. Spadea at 610 521 0604.  The Law Offices of Spadea & associates, LLC has been helping landlords and tenants since 2001 and is located in Ridley Park, Pennsylvania.

2014 Changes to Reverse Mortgages


Several changes have been made to the federally insured Home Equity Conversion Mortgage (HECM) reverse mortgage program to shore up the viability of the program. The changes are generally designed to improve the odds that homeowners taking out a reverse mortgage will be able to meet their obligations and not become a burden on the program. The changes are generally effective for new reverse mortgages after September 30, 2013. Additional financial assessment and set-aside requirements take effect January 13, 2014.

Initial disbursements limited

One change generally restricts the amount that can be disbursed to you within one year of your obtaining the reverse mortgage. Under the new rules, the maximum amount that can be disbursed to you at closing or during the first 12-month disbursement period is equal to the greater of (a) 60% of the principal limit or (b) the sum of your mandatory obligations plus 10% of the principal limit (not to exceed 100% of the principal limit). Mandatory obligations include items such as the initial mortgage insurance premium, the loan origination fee, recording fees and taxes, credit reports, a survey, a title examination, title insurance, a property appraisal fee, fees for warranties or inspections, funds to pay any required repairs, and amounts used to discharge liens, debt, and taxes. Except in the case of a single disbursement lump-sum payment option, additional amounts can be disbursed in later years, up to 100% of the available principal limit.

New mortgage insurance premium rates

Another change increases the basic initial mortgage insurance premium, and applies an even higher rate if more than 60% of the principal limit can be disbursed to you in the first year. Under the new rules, an initial mortgage insurance premium fee of 0.5% of the maximum claim amount will generally be charged. The initial fee is increased to 2.5% of the maximum claim amount if required or available disbursements to you at closing or during the first 12-month disbursement period are greater than 60% of the principal amount. In either case, there is also an annual fee equal to 1.25% of the mortgage balance.

Financial assessment and set-asides

Finally, changes are made to improve the odds that you will be able to meet certain of your obligations under the reverse mortgage. For reverse mortgages assigned on or after January 13, 2014, you must undergo a financial assessment prior to approval and closing on a reverse mortgage. Based on your assessment and as a condition of loan approval, you may be required to use proceeds from the reverse mortgage to fund a lifetime expectancy set-aside for payment of property charges or authorize the mortgagee to pay property charges from your monthly payments or your line of credit. Property charges include property taxes, hazard insurance, and flood insurance.

If you are considering a reverse mortgage please contact Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC in Ridley Park Pennsylvania.

Understanding Pennsylvania Commercial Real Estate Tax Appeals

Upscale Shopping Center

If your Pennsylvania commercial property was built in the last 15 years in Montgomery, Chester or Delaware counties, there is a good chance the value of your property is over-assessed. Before deciding whether to do a real estate tax appeal, you should first speak with a commercial appraiser to do a preliminary analysis using one or more of the three valuation methods.

  1. The Income Approach to value is a method of converting your anticipated monthly rental income into present value by capitalizing net operating income by a market derived capitalization rate. Essentially, a capitalization rate is a rate of return on investment. Capitalization rates are taken from sales of similar investment properties and applied to the net income of the property to determine the market value of your property.

    There are several ways to estimate value using capitalization. The method used depends upon several factors such as the timing and regularity of the cash flows, period of time the investment is held, whether or not long term leases are involved. Direct capitalization is the most widely used and simplest approach to apply because it does not require explicit projections of income and assumes that expectations for future income are similar for all the properties compared. It is used when income is not expected to vary significantly over time. Direct capitalization typically involves an average of several years’ income. The net operating income is then capitalized by an overall capitalization rate to arrive at market value.

  2. The Sales Comparison Approach to value looks at comparable commercial properties that have similar use and square footage that were sold in the area in the last year. This is the same method used in residential tax appeals.
  3. The Cost Approach is typically used for vacant land or property that does not generate income. The cost approach is performed by valuing the land at its highest and best use. The fundamental premise of the cost approach is that a potential user of the property would not pay more for the property than it would cost to build an equivalent property. The value of the land plus the depreciated cost of the improvements should equal the total market value estimate.

    The appraiser would take an average of all methods that apply to arrive at the fair market value and multiply it by the common level ratio to arrive at the correct assessed value. If that correct assessed value is less than the actual assessed value of your property you should contact Gregory J. Spadea at 610-521-0604 or online of Spadea & Associates, LLC. The deadline to file an annual real estate tax appeal is August 1. Keep in mind the appraiser may need four to six weeks to complete an appraisal so you need to contact the appraiser in May or June to meet the August 1, filing deadline.

Why I Should Consider Using a Qualified Personal Residence Trust

A house

If you own a residence or a second home and expect to pay federal estate tax and want to pass the property to your children, then you should consider a Qualified Personal Residence Trust (QPRT). You transfer your personal residence or vacation home into the QPRT in exchange for continued rent-free use of the property for a specific number of years (trust term). Assuming you survive the trust term, the residence either passes outright to the beneficiaries of the trust or can remain in trust for their benefit. It is important that you understand that you can continue to use the property once the title has been transferred to the QPRT, but when the term ends you will have to pay rent to the new owners.

A QPRT is valuable because it reduces your taxable estate and freezes the gifted property value so all the appreciation is excluded from your estate. The valuation of this transfer is dependent upon several factors including the trust term, life expectancy of the grantor and the IRS §7520 interest rate for the month of the transfer.

For example if Regina, age 65, on September 15, 2014, transfers her beach home with $1 million market value to a QPRT, she retains the right to use the home for a term of 10 years. Assuming she outlives the 10-year trust term, the house would pass to her three children. The Internal Revenue Code §7520 rate in the month of the gift (September 2014) is 2.2% so the initial taxable gift would be valued at approximately $425,000. So long as Regina’s lifetime taxable gifts have not exceeded $5.34 million which is the 2014 limit, no federal gift tax would be payable, although she would have to file a federal gift tax return. In any event, if Regina survives for the full trust term, the residence will pass to her three children with no additional gift or estate tax inclusion. Assuming the beach home was worth $2.5 million at the end of the 10 year term, Regina would have been able to transfer a $2.5 million beach home to her three children at a transfer tax inclusion of $425,000. Because a QPRT is a future interest gift, the $14,000 annual gift exclusion is not available. However, if Regina does not outlive the ten year trust term then fair market value of the beach home is brought back into her estate while the earlier taxable gift of $425,000 is removed. If the beneficiaries inherit the house before the trust term ends they will get a step up in basis to the fair market value of the property for federal income tax purposes. However, if the beneficiaries sell the house after the trust term they get the grantor’s basis. So if Regina’s basis is $550,000 and the beneficiaries sell the house for $2,500,000, they would have to pay federal income tax on the capital gain of $1,950,000.

After the 10 year trust term Regina could lease the beach home from her three children. Lease payments are another means to benefit heirs without any further gift or estate tax consequences. However, the children would have to pay income tax on the net lease income.

The older you are and the longer the trust term, the smaller the taxable gift. However, you must outlive the trust term. Therefore, your current health and family medical history should be a major focus of QPRT planning. In addition you should ensure the beneficiaries have the same opinion of what to do with the property after the trust term ends. If you have any questions please contact Gregory J. Spadea at 610-521-0604, of Spadea & Associates, LLC in Ridley Park, Pennsylvania.

Probating a Pennsylvania Estate

Probating estates is also referred to as estate administration which is the process of managing and distributing a person’s probate property after their death. If the person had a will, the will goes through probate, which is the process by which the deceased person’s property is passed to his or her heirs and legatees (people named in the will). The entire process usually takes about 18 months. However, distributions from the estate can be made in the interim.

Here we set out the steps the surviving family members should take. These responsibilities ultimately fall on whoever was appointed executor in the deceased family member’s will. You should meet with an attorney to review the steps necessary to administer the decedent’s estate. Bring as much information as possible about assets, taxes and debts. Estate administration in Pennsylvania include the following steps:

  1. 1. Filing the original will and Death Certificate at the County Register of Wills in order to be appointed executor. You will take an oath, sign the petition and pay a probate fee to get the letters testamentary issued to you appointing you as executor. In the absence of a will, heirs must petition the court to be appointed administrator of the estate and may have to post a bond.
  2. 2. Giving formal notice to all the beneficiaries named in the will, and then filing a report with the Register of Wills.
  3. 3. Collecting all the assets. This means that you have to find out everything the deceased owned. You need to file a list, known as an Inventory with the Register of Wills within nine months of the date of death. You will also need to open an estate bank account to consolidate all the estate funds. Bills and bequests should be paid from the estate bank account, so that you can keep track of all expenditures.
  4. 4. Paying the federal estate tax if applicable and Pennsylvania inheritance taxes. If the estate was over $5,490,000 then a federal estate tax return needs to be filed for 2017. If any assets pass to anyone other than the spouse you need to file a Pennsylvania inheritance tax return. If you prepay the Pennsylvania Inheritance Tax within three months of the date of the death you receive a 5% discount. The Pennsylvania inheritance tax return is due nine months after the date of death, but you can apply for a six month extension to file the return.

    5. Filing final income tax returns. You must also file a final federal and Pennsylvania income tax return for the decedent for the year of death. If the estate holds any assets and earns over $600 of interest or dividends, or over $600 from sales of property a fiduciary income tax return for the estate will need to also be filed.

    6. Paying the administrative expenses and all the debts of the estate. The estate needs to pay for the funeral, probate fees, attorney fees and other administrative expenses first. The secured creditors are paid next, and then the unsecured creditors are paid with whatever is left. If creditors are not paid in the proper order, the executor may be held personally liable for the estate’s debts.

    7. Filing a Disclaimer with the Orphan’s Court within 9 months of the date of death.

    8. Distributing property to the heirs and beneficiaries. Generally, executors do not pay out all of the estate assets until after all the known creditors are paid, and the period runs out for other creditors to make claims.

  5. 9. Notifying the Pennsylvania Attorney General for any specific bequests over $25,000 or any bequests paid as percentage of the estate or any charitable bequests that will not be made.
  6. 10. Filing an informal final account. The executor must file an informal final account with all the beneficiaries listing any income to the estate since the date of death and all expenses and estate distributions. Once the beneficiaries sign a receipt and release approving the informal final account, the executor can distribute whatever is left in the reserve, close the estate bank account and file a status report with the Register of Wills.

If you need help probating an estate please contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604.

Probating estates is also referred to as estate administration which is the process of managing and distributing a person’s probate property after their death. If the person had a will, the will goes through probate, which is the process by which the deceased person’s property is passed to his or her heirs and legatees (people named in the will). The entire process usually takes about 18 months. However, distributions from the estate can be made in the interim.

Here we set out the steps the surviving family members should take. These responsibilities ultimately fall on whoever was appointed executor in the deceased family member’s will. You should meet with an attorney to review the steps necessary to administer the decedent’s estate. Bring as much information as possible about assets, taxes and debts. Estate administration in Pennsylvania include the following steps:

  • 1. Filing the original will and Death Certificate at the County Register of Wills in order to be appointed executor. You will take an oath, sign the petition and pay a probate fee to get the letters testamentary issued to you appointing you as executor. In the absence of a will, heirs must petition the court to be appointed administrator of the estate and may have to post a bond.
  • 2. Giving formal notice to all the beneficiaries named in the will, and then filing a report with the Register of Wills.
  • 3. Collecting all the assets. This means that you have to find out everything the deceased owned. You need to file a list, known as an Inventory with the Register of Wills within nine months of the date of death. You will also need to open an estate bank account to consolidate all the estate funds. Bills and bequests should be paid from the estate bank account, so that you can keep track of all expenditures.
  • 4. Paying the federal estate tax if applicable and Pennsylvania inheritance taxes. If the estate was over $5,490,000 then a federal estate tax return needs to be filed for 2017. If any assets pass to anyone other than the spouse you need to file a Pennsylvania inheritance tax return. If you prepay the Pennsylvania Inheritance Tax within three months of the date of the death you receive a 5% discount. The Pennsylvania inheritance tax return is due nine months after the date of death, but you can apply for a six month extension to file the return.

    5. Filing final income tax returns. You must also file a final federal and Pennsylvania income tax return for the decedent for the year of death. If the estate holds any assets and earns over $600 of interest or dividends, or over $600 from sales of property a fiduciary income tax return for the estate will need to also be filed.

    6. Paying the administrative expenses and all the debts of the estate. The estate needs to pay for the funeral, probate fees, attorney fees and other administrative expenses first. The secured creditors are paid next, and then the unsecured creditors are paid with whatever is left. If creditors are not paid in the proper order, the executor may be held personally liable for the estate’s debts.

    7. Filing a Disclaimer with the Orphan’s Court within 9 months of the date of death.

    8. Distributing property to the heirs and beneficiaries. Generally, executors do not pay out all of the estate assets until after all the known creditors are paid, and the period runs out for other creditors to make claims.

  • 9. Notifying the Pennsylvania Attorney General for any specific bequests over $25,000 or any bequests paid as percentage of the estate or any charitable bequests that will not be made.
  • 10. Filing an informal final account. The executor must file an informal final account with all the beneficiaries listing any income to the estate since the date of death and all expenses and estate distributions. Once the beneficiaries sign a receipt and release approving the informal final account, the executor can distribute whatever is left in the reserve, close the estate bank account and file a status report with the Register of Wills.

If you need help probating an estate please contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604.

When Does an Estate Fiduciary Income Tax Return Need to be Filed

The estate must file a 1041 fiduciary income tax return if the estate has income or property sales over $600 during the tax year. So if the executor receives a 1099 under the Estate Tax Identification Number for over $600 of interest or dividend income, or real estate is sold in a subsequent year after death, a fiduciary income tax return will have to be filed. The federal estate fiduciary 1041 income tax return is due 3½ months after the close of the tax year.

Normally, estate fiduciary returns result in “excess deductions on termination”, which can be divided equally among all the beneficiaries, and used by them as itemized deductions on their personal federal income tax returns to increase their income tax refund.

There is no income tax on inheritances except to the extent that such items represent tax deferred items such as pension plans, annuities, IRA’s, and accrued E bonds or to the extent that they represent income earned after death, there is no inheritance tax on such post-death income. Income tax on such tax deferred items is due by the beneficiaries in the year they receive the income. A final federal income tax return for your loved one must be filed, assuming he met the filing threshold which for the 2014 tax year is $11,700, excluding social security for a decedent over the age of 65. In addition, if federal income tax was withheld, you would file to get the federal income tax refund regardless of the income earned.

There is never any Pennsylvania income tax due on inherited property including tax deferred property such as pension plans, IRA’s or annuities.

If there are U.S. Savings Bonds, the significant factors are: (a) the turnover date; and (b) income tax on accrued interest. The turnover date means that since bonds increase in value every six months, there is a loss of up to five months interest if cashing is not made in one of the two months in each year in which value increases. There are three choices with respect to reporting accrued interest on Savings Bonds: (1) Report it on the decedent’s final 1040 return; if he owes no tax, even with the interest included, this is the clear choice; (2) Report it on the estate’s fiduciary 1041 return, if this is done, ensure you have sufficient estate deductions to offset against the bond interest; or (3) Transferring the bonds without cashing, which makes sense if the beneficiary is in a low tax bracket.

If you were named as a beneficiary of an Individual Retirement Account (IRA), then you should consider the possibility of electing to stretch the pay-out over your own life expectancy if the plan administrator permits it. If not then you can take distributions over 5 years or elect to withdraw the entire balance. However, you must pay federal income tax on any distributions you receive in the year received.

Real estate, like stock, takes a stepped up basis at death, so that original cost to the decedent is irrelevant for income tax purposes. If you decide to sell a house and do not need the aid of a real estate agent to find a buyer, we can handle all the paperwork from the agreement of sale to closing for an additional fee. Keep in mind if you do not sell the property within fifteen months after the date of death we must value the property using the common level ratio or based on an appraisal.

Contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604 if you need help administering an estate or find yourself being appointed as an Executor.

Is My Property Exempt From Pennsylvania Real Estate Tax?

A house

If you own a property that is regularly used by a charity or falls into one of the 8 categories below you may be exempt from paying real estate tax. To qualify for an exemption your property must be:

  1. Zoned in your Current Municipality for a Real Estate Tax Exemption
  2. An actual place of regular religious worship;
  3. A non-profit burial place;
  4. Property used regularly for public purposes;
  5. Owned Occupied and used by any branch or post of honorably discharged service persons and regularly used for charitable or patriotic purposes;
  6. Actually and regularly used by an institution of purely public or private charity for the purpose of the institution;
  7. A Hospital or institution of learning (schools) or charity including fire and rescue station founded and maintained by public or private charity; or
  8. A Public Library, museum, art gallery or concert music hall provided and maintained by public or private charity.

If your organization falls into any one of the seven categories listed above you can apply for an exemption from real estate tax in the county you are located. If you have any questions call Spadea & Associates, LLC at 610-521-0604.

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