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If you\u2019re planning your estate, or you\u2019ve recently inherited assets, you may be unsure of the \u201ccost\u201d (or \u201cbasis\u201d) for tax purposes.<\/p>\n
The current rules<\/strong><\/p>\n Under the current fair market value basis rules (also known as the \u201cstep-up and step-down\u201d rules), an heir receives a basis in inherited property equal to its date-of-death value. So, for example, if your grandmother bought stock in 1935 for $500 and it\u2019s worth $1 million at her death, the basis is stepped up to $1 million in the hands of your grandmother\u2019s heirs \u2014 and all of that gain escapes federal income tax.<\/p>\n The fair market value basis rules apply to inherited property that\u2019s includible in the deceased\u2019s gross estate, and those rules also apply to property inherited from foreign persons who aren\u2019t subject to U.S. estate tax. It doesn\u2019t matter if a federal estate tax return is filed. The rules apply to the inherited <\/em>portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his or her inheritance. The fair market value basis rules also don\u2019t apply to reinvestments of estate assets by fiduciaries.<\/p>\n Gifting before death<\/strong><\/p>\n It\u2019s crucial to understand the current fair market value basis rules so that you don\u2019t pay more tax than you\u2019re legally required to.<\/p>\n For example, in the above example, if your grandmother decides to make a gift of the stock during her lifetime (rather than passing it on when she dies), the \u201cstep-up\u201d in basis (from $500 to $1 million) would be lost. Property that has gone up in value acquired by gift is subject to the \u201ccarryover\u201d basis rules. That means the person receiving the gift takes the same basis the donor had in it ($500 in this example), plus a portion of any gift tax the donor pays on the gift.<\/p>\n A \u201cstep-down\u201d occurs if someone dies owning property that has declined in value. In that case, the basis is lowered to the date-of-death value. Proper planning calls for seeking to avoid this loss of basis. Giving the property away before death won\u2019t preserve the basis. That\u2019s because when property that has gone down in value is the subject of a gift, the person receiving the gift must take the date of gift value as his basis (for purposes of determining his or her loss on a later sale). Therefore, a good strategy for property that has declined in value is for the owner to sell it before death so he or she can enjoy the tax benefits of the loss.<\/p>\n Change on the horizon?<\/strong><\/p>\n Be aware that President Biden has proposed ending the ability to step-up the basis for gains in excess of $1 million. There would be exemptions for family-owned businesses and farms. Of course, any proposal must be approved by Congress in order to be enacted.<\/p>\n These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person\u2019s executor may be able to make an alternate valuation election. Contact us for tax assistance when estate planning or after receiving an inheritance. We\u2019ll keep you up to date on any tax law changes.<\/p>\n \u00a9 2021<\/em><\/p>\n <\/body> If you\u2019re planning your estate, or you\u2019ve recently inherited assets, you may be unsure of the \u201ccost\u201d (or \u201cbasis\u201d) for tax purposes. The current rules Under the current fair market value basis rules (also known as the \u201cstep-up and step-down\u201d rules), an heir receives a basis in inherited property equal to its date-of-death value. So, […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,6,10],"tags":[8,11,12],"class_list":["post-15592","post","type-post","status-publish","format-standard","hentry","category-articles","category-individual-tax","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15592","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=15592"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15592\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=15592"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=15592"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=15592"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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