Estate Planning: Inherited property & taxes

Did you inherit an asset that you now plan to sell? If so, and if the asset increased in value during the prior owner’s life, you generally won’t owe capital gains tax on that predeath appreciation when you sell the property.

Here’s why:

The value of inherited property currently steps up in basis. Under current federal tax rules, when you inherit an asset that has appreciated in value your tax basis is increased to the fair market value of the property on the former owner’s date of death (or alternate valuation date six months after the date of death).

Therefore, when you sell the property you don’t have to pay capital gains tax on the appreciation that occurred before the decedent’s death. You’ll only owe taxes on any appreciation that occurred after the date of death.

(If the property has instead declined in value from the time it was acquired by the decedent, the tax basis is stepped-down to the fair market value on the date of death.)

Only transfers made at death qualify for this special tax treatment; gifts made during life are not entitled to this stepped-up basis.

New rules limit this step-up basis. In 2010 when estate taxes are scheduled to be fully, but only temporarily, repealed, the current stepped-up basis for inherited property will be limited.

A modified carryover basis rule will go into effect in its place. However, since the Tax Act that created the new rules expires in 2011, the carryover rules are only scheduled for that one year – unless future legislation is enacted before then.

Most estates still won’t be subject to capital gains tax under the new rules. If the modified carryover basis rules do go into effect in 2010, the majority of taxpayers who inherit property still won’t be subject to this new capital gains tax.

That’s because estates will generally be allowed to increase the cost basis of certain assets up to a certain amount.

Specifically, an estate is allowed up to $1.3 million in predeath appreciation before its subject to tax. In addition, for property transferred to a surviving spouse, estates can increase basis by an additional $3 million. Therefore, an estate can pass $4.3 million of capital gains tax free to a spouse and $1.3 million to other beneficiaries.

Inherited property above these limits will retain the same basis it had for the deceased person. Consequently, that property will be subject to capital gains taxes when sold. In that case, beneficiaries will have the burden of determining how much their inherited assets have increased in value since the former owner acquired them.

Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.

Privacy Practices Security Practices Business Continuity Plan Supported Browsers Report a Site Problem Linking To Third Parties
©1997-2009 CUNA Mutual Group.