STEPPED-UP BASIS
Stepped-up basis is an incredible benefit to people who inherit property. You can recognize the basis or cost value of the property at fair market value at the time of the decedent’s death. That means you avoid recognizing the gain between the decedent’s cost and what it is worth when it is inherited.
For example, a person purchases a home for $100,000. 20-years later when they pass away, the property market value is $500,000. There potential gain in the property value is $400,000. However, because of a tax provision called step-up tax basis, the person inheriting the property will have a basis of the fair market value at the time of death.
The recipient could sell the property for $500,000 and have no taxable gain on the sale.
GET A FORMAL APPRAISAL
A formal appraisal is the most reliable and defensible estimate of fair market value when you inherit property. There will be a fee of several hundred dollars for the appraisal. Another alternative is to get a broker’s opinion of value in writing. It may be reasonable to get three opinions to see if they are similar. They should rely on comparable sales to justify their position. Either method is acceptable to IRS.
NOT ONLY FOR THE WEALTHY
The President has mentioned the possibility of eliminating this step-up in basis benefit. Some people consider it to be a tax loophole for the ultra-rich. However, it can impact ordinary people who inherit property and don’t want to sell it. It allows families to leave assets to their heirs without having to pay capital gains tax.
Take for example, a person inherits a farm from his parents. The heir may not be able to afford to pay the capital gains tax due at time of transfer. This could forced them to have to sell the property or borrow the money to pay the tax.
Federal estate tax is paid from the deceased’s remaining estate, not by the heir. If the decedent’s estate is approaching the limit before estate taxes are due, consider seeking professional tax. This is because there could be additional provisions in play. Find more information on property inheritance on IRS.gov.