Do inherited property get step up in basis? This is a question that often arises when individuals inherit property from a deceased loved one. Understanding the concept of step-up in basis is crucial for both heirs and estate planners, as it can significantly impact the tax implications of inherited assets. In this article, we will delve into what step-up in basis means, how it works, and its implications for inherited property.
Step-up in basis refers to the adjustment of the cost basis of an inherited asset to its fair market value at the time of the owner’s death. This adjustment is provided under the Internal Revenue Code and is intended to prevent double taxation on the same asset. Essentially, when an individual inherits property, the basis of that property is stepped up to its value at the time of the original owner’s death, rather than the original owner’s cost basis.
Why is this adjustment important?
The primary purpose of step-up in basis is to avoid the double taxation that could occur if the inherited property were sold immediately after the owner’s death. If the basis of the inherited property were not adjusted, the heir would be taxed on any gains realized from the sale of the property, as if they had owned it from the beginning. This could result in a substantial tax burden for the heir.
How does step-up in basis work?
When an individual inherits property, the executor of the estate or the heir must determine the fair market value of the property at the time of the owner’s death. This value is then used as the new basis for the inherited property. The difference between the original cost basis and the new basis is not subject to capital gains tax when the property is sold.
For example, let’s say a person inherits a house that their parent purchased for $100,000. If the house is valued at $200,000 at the time of the parent’s death, the step-up in basis will increase the inherited property’s basis to $200,000. If the heir decides to sell the house for $250,000, they will only be taxed on the $50,000 gain, rather than the original $150,000 gain that would have been calculated based on the parent’s cost basis.
Are there any exceptions to step-up in basis?
While step-up in basis generally applies to most inherited property, there are some exceptions. For example, inherited property held in a trust may not receive a step-up in basis. Additionally, certain types of property, such as collectibles and marketable securities, may be subject to a different valuation method and potentially a different step-up in basis calculation.
Conclusion
Understanding the concept of step-up in basis is essential for anyone dealing with inherited property. By stepping up the basis of inherited assets, heirs can avoid unnecessary tax burdens and ensure that the property is passed on with as little tax liability as possible. It is always advisable to consult with a tax professional or estate planner to navigate the complexities of inherited property and step-up in basis.
