Understanding Pennsylvania Commercial Real Estate Tax Appeals

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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.

Five Reasons Why Joint Accounts May Be a Poor Estate Plan

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Many people view joint ownership of bank or brokerage accounts as an easy and inexpensive way to avoid probate since joint property passes automatically to the joint owner at death. Joint ownership can also be an easy way to plan for incapacity since the joint owner of accounts can pay bills and manage investments if the primary owner gets sick or becomes incapacitated. Although joint accounts make sense for some assets like a primary residence for married couples, there are five drawbacks as well such as:

  1. Creditor Risk. Joint owners of accounts have complete access and the ability to use the funds for their own purposes. In addition, the funds are available to the creditors of all joint owners. If a senior applies for Medicaid or other public benefits half the joint account could be considered as belonging to them as well as the other joint owners.
  2. Inequity Regarding Other Beneficiaries. If a parent has one child on certain accounts, but not all children, at death that one child may end up inheriting more than the others. While the parent may expect that all of the children will share equally, and often they do in such circumstances, there’s no guarantee.
  3. Unexpected Death of Joint Owner. A system based on joint accounts can fail if a child passes away before the parent. Then it may be necessary to set up a trust to manage the funds or they may ultimately pass to the surviving siblings with nothing or only a small portion going to the deceased child’s family. For example, a mother put her house in joint ownership with her son to avoid probate and Medicaid’s estate recovery claim. When the son died unexpectedly, her daughter-in-law was left high and dry despite having devoted the prior four years to caring for her husband’s mother.
  4. Loss of Control. If a parent adds a child to an account making it a joint account, that parent may lose control over the account and decisions may be made without his consent. The problem with that is the child can withdraw all of the money, regardless of their contribution to the account.
  5. Income Tax Considerations. The beneficiaries do not get the full stepped up basis for income tax purposes when they inherit jointly owned real estate. Therefore if they later
    sell the house they will have to pay federal and state income taxes on the capital gain which is 14% to 19% higher than Pennsylvania inheritance taxes.

Joint accounts do work well in two situations. First, if you have only one child and want everything to go to him or her, joint accounts can be a simple way to provide for succession. It has some of the risks described above, but for most people the risks are outweighed by the convenience of joint accounts. Second, if you put one or more children on your primary checking account to allow them pay the recurring monthly bills and have access to funds in the event of incapacity or death. However, for the rest of your assets, wills, trusts and durable powers of attorney are much better planning tools. They do not put your assets at risk. They provide that the estate will be distributed according to your wishes or in the event of a child’s incapacity or death. In addition they provide for asset management in the event you become incapacitated. If you do not have these documents or have any questions please contact Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, Pennsylvania.

Checklist of What Must be Done After Your Loved One Dies

Clipboard with checklist

  1. Contact Funeral home to make arrangements.
  2. Publish Obituary notice.
  3. Obtain 10 Certified Death Certificates from the Undertaker.
  4. Contact Social Security, the Veterans Administration, and any other payers of pensions to stop direct deposits.
  5. Locate original will, trust, insurance policies and deeds and inventory all assets.
  6. Secure your loved ones home and valuables.
  7. Have the mail forwarded to the executor.
  8. Notify creditors and utility companies.
  9. Contact all three credit reporting agencies and cancel all the credit cards in your loved one’s name.
  10. Contact an attorney (Gregory J. Spadea) to see if probating the estate is necessary.
  11. If probating the estate is not necessary, transfer title on all the jointly owned assets to remove your loved one’s name and social security number.
  12. Update your life insurance policy to remove your loved one as beneficiary.

Feel free to contact Gregory J. Spadea, Esquire of Spadea & Associates, LLC online or at 610-521-0604 to help you probate your loved one’s estate.

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.

What Happens to Your Debts When You Die?

When you die, your executor has responsibility to pay all your remaining debts if your estate has enough probate assets to pay them. Probate assets are assets that were in your name alone and pass by your will. Before your executor pays any creditors he or she must first pay the estate administration expenses such as funeral costs, grave marker, probate fees, medical bills, attorney fees and rent for the previous six months prior to your death. After the administrative expenses are paid, the secured creditors are paid and any probate assets remaining will go to pay unsecured creditors.

If the estate is not solvent, and a creditor is paid more than he is entitled to receive, the executor can be held personally responsible to the extent of the overpayment. The executor also may be personally liable if he or she distributes estate property without having given proper notice to those having a claim against the estate.

As a general rule, debt collectors may not try to collect from your heirs. However, there are several exceptions. The first exception is if an heir was a co-signer of a particular debt in which case they would be responsible for that debt or if someone held property jointly with you, they would be responsible for any debts on the joint property. The third exception is if an heir inherits a car or a boat that had an outstanding loan, they would have to pay the loan off or the car or boat would be repossessed by the lender.

Creditors cannot be paid from any assets that pass directly to a beneficiary. Assets that pass directly to a beneficiary are called non-probate assets and include jointly owned bank accounts and any account or life insurance policy with a named beneficiary. Therefore a jointly held bank account would pass directly to the joint owner, and the funds in that account could not be used to pay creditors. Similarly, life insurance policies pass directly to the beneficiaries, so creditors do not have access to those funds. In addition creditors cannot access funds held in an irrevocable trust.

A debt collector may not contact your heirs or relatives to try to collect payment unless they were co-signers of the debt or the debt was a jointly owned debt. Debt collectors are allowed to contact the executor of your estate, or your spouse, or your parents if you were a minor, to discuss the debts but may not discuss the debts with anyone else.

Contact Gregory J. Spadea

If you have any questions or need help probating an estate 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.

Wrongful Death Proceeds Are Not Subject to Pennsylvania Inheritance Tax or Federal Income Tax

The Pennsylvania Wrongful Death statute allows the personal representative of an estate to bring an action for the benefit of a decedent’s spouse, children or parents to recover damages for the death of the decedent caused by the wrongful act, neglect, unlawful violence of another. The statute entitles a plaintiff to recover damages for pain and suffering, loss of earning power, medical and hospital bills, funeral expenses and certain estate administration expenses.

Wrongful death proceeds are not taxable for Pennsylvania Inheritance purposes or for federal income tax purposes. On the other hand survival action proceeds are subject to Pennsylvania inheritance tax. Since Pennsylvania taxes survival actions but not wrongful death actions, you, through your attorney want to maximize the wrongful death recovery amount. The court tends to allocate the proceeds of wrongful death actions and survival actions based upon the facts of the case and the evidence presented by your attorney.

Under the Pennsylvania Probate, Estate and Fiduciary code the Pennsylvania Department of Revenue is an interested party in any orphan’s court proceeding. Therefore your attorney must get written consent from the Pennsylvania Department of Revenue regarding the proposed allocation since its interests will be adversely affected by the amount allocated to the wrongful death action.

Survival Actions are valued at the decedent’s date of death for Pennsylvania Inheritance tax purposes. Any unpaid Inheritance tax is due within thirty days after the estate receives the proceeds. If there is any tax due beyond thirty days the Pennsylvania Department of Revenue begins charging interest on the unpaid balance which is currently 6%.

Contact Gregory J. Spadea

If you have a question about a wrongful death action or survival action please contact Spadea & Associates, LLC online or at 610-521-0604, located in Ridley Park, Pennsylvania.

Gifting as an Estate Planning Tool

Person being handed a house

The annual Exclusion for 2014 is $14,000 and is indexed for inflation so it will increase in the future. The person making the gift is the donor and the recipient of the gift is known as the donee. The donee never pays income tax on any gifts received because the Internal Revenue Code Section 102 specifically excludes gifts from income. If you have a large estate and want to use gifting to reduce your estate or inheritance tax you may want to consider one or all of the following strategies:

  • You can gift up to $14,000 in 2014 to any individual or you can make a joint gift with your spouse of $28,000 per year per person without affecting your $5.34 million estate tax exemption or unified credit. Keep in mind if you decide to gift a larger amount than the annual exclusion you can file a form 709 gift tax return and use up some of your $5.34 Million estate exemption.
  • You can also pay a donee’s tuition directly to the school which would not count toward the $14,000 annual exclusion.
  • If you pay a donee’s medical bills directly to the hospital or health care provider which also would not count toward the $14,000 annual exclusion.
  • You can also donate to a donee’s 529 College Savings Plan and give $70,000 individually or $140,000 with your spouse to make a joint gift to reduce your estate. However, if you give the maximum it wipes out your annual exclusion for that specific donee for the next 5 years. You can also change the donee in the future if that donee decides not to attend college. If the donee does attend college the amount withdrawn from the 529 plan to pay for tuition, books and fees are free of income tax.
  • If you have your own corporation or limited liability company (LLC) and you have a child or relative who works in the business, you can gift non-voting shares of the corporation or non- voting units of the LLC to that person over time but maintain control since you own all the voting shares.
  • If you have any questions about any of the gifting strategies listed above, feel free to contact Gregory J. Spadea at 610-521-0604. Gregory is the managing member of Spadea & Associates, LLC located in Ridley Park, Pennsylvania.

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