Property Inheritance
Stepped-up basis is an incredible benefit to people who inherit property. Not only do they receive the property itself, the basis or cost value of the property becomes the fair market value at the time of the decedent’s death. This avoids recognizing the gain between the decedent’s cost and what it is worth when it is inherited.
If a person had purchased a home for $100,000 and 20-years later when they died, it was worth $500,000, there would be a potential gain in the property of $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.
A formal appraisal is the most reliable and defensible estimate of fair market value at the time of the decedent’s death. 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.
There is discussion from the current President about the possibility of eliminating the step-up in basis that allows families to leave assets to their heirs without having to pay capital gains tax. Some people consider it to be a tax loophole for the ultra-rich but it can impact ordinary people who inherit property and do not want to have to sell it.
An example would be a family farm that when inherited by the heirs may not be able to afford to pay the capital gains tax due at time of transfer and they could be forced to sell the property or borrow the money to pay the tax, assuming that was possible.
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, currently $11.7 million, professional tax advice should be considered because there could be additional provisions in play. More information on this can be found on IRS.gov.