BASIS STEP-UP 101
Property (real or otherwise) inherited by family or friends is not considered to be taxable by the federal government. The ability to be taxed on a piece of property that is inherited can be a big concern and point of confusion for many people. The lesser known IRS “gift” Basis Step-Up, also known as IRC 1014, provides that the value of property received from a decedent will not be the decedent’s cost basis (original purchase price), but the fair market value at the date of death of the decedent or alternate valuation date.
For example, let’s assume that June inherits the piece of real property from her sister[EJC1], Nancy. The property was purchased in 1980 for $100,000. When June inherits the property in 2019 upon her sister’s death, it is worth $800,000. If Nancy had sold the property in 2019, she would have had to pay income taxes on a $700,000 gain. However, she passed away before selling it and the property was bequeathed to June. IRC 1014 protects June from having to pay income taxes on the property in 2019 because she inherited it. In fact, June’s basis in the inherited property will not be the $100,000 original purchase price but the fair market value of $800,000. What if June later sells the property for $1 million? June will pay income taxes on the $200,000 gain that accrued while she owned the property. The $800,000 gain went away when Nancy passed away.
Would all the property that June inherits receive the Basis Step-Up protection then?
Not necessarily. Cash, of course, would not receive Basis Step-Up protection because there’s nowhere to step it up from or to because its value stays the same. Jointly held property, whether as joint tenants or tenants in common, will receive the step-up only on the portion of the property that belonged to the decedent. In states with community property however; the surviving spouse will receive the step-up on the entire property. If the property was inherited as a loss, the value to the beneficiary will still be the fair market value at the time of inheritance. The loss would vanish, same as the gain, so heirs wouldn’t have the opportunity to use that loss to offset their personal taxes.
As a disclaimer, this is a very broad explanation to explain the benefits of IRC 1014 and is meant to illustrate why income taxes on inherited properties shouldn’t be a worry to individuals planning their estates.
About the Law Office of Jan A. Meyer
The Law Office of Jan A. Meyer was founded in 2011 in Dana Point, California. It was established to provide clients with committed and compassionate estate planning services to assist with asset protection and strategic goals. Our law firm provides a personalized and cost-effective alternative to large law firms or self-guided online forms. At the Law Office of Jan A. Meyer, families and individuals are guided through a series of decisions to build a plan that ensures their financial and personal legacy are protected when they are no longer able to care for it. Learn more at www.danapointwills.com.