Step-up in basis
A special provision of the U.S. tax code, known as step-up in basis, [1] [2] applies to appreciated taxable assets at death. [note 1] In most instances, a property's tax basis is stepped-up to fair market value at the time of the decedent's death, or, alternately, at a valuation date six months later. [3] Step-up in basis can differ, however, depending on how the property is titled.
Contents
Property titling and step-up in basis
The actual tax basis of stepped-up property will differ depending on how the property is titled.
Sole property
For sole ownership and sole or separate property [note 2] held in a revocable trust the death of the asset owner results in the asset's stepping-up in value.
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Joint tenancy
For assets held in joint tenancy, stepped-up valuation applies only to the deceased partner's share of the property.
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Community property
Community property steps up whenever a spousal partner dies.
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Step-down valuation
If a decedent's adjusted basis in property is higher than the fair market value, the beneficiary's basis will equal the fair market value of the property at the time the decedent dies. [note 4]
Notes
- ↑ Not all assets qualify for stepped-up valuation. Retirement accounts, annuities, and savings bonds are some of the more commonly held accounts and assets that the IRS considers income in respect of a decedent and does not step-up in value after the owner dies. See Income in respect of a decedent for additional information.
- ↑ In community property states, separate property is property owned and controlled entirely by one spouse in a marriage. At divorce, separate property is not divided under the state's property division laws, but is kept by the spouse who owns it. Separate property includes all property that a spouse obtained before marriage, through inheritance, or as a gift. It also includes any property that is traceable to separate property, and any property that the spouses agree is separate property. - from Nolo dictionary of legal terms, separate property
- ↑ Although joint ownership allows a spouse to inherit assets without probate, the surviving spouse now holds the property as a sole owner. At this juncture, using a revocable living trust or payable on death accounts is often recommended for asset ownership rather than joint tenancy with non-spousal partners. The potential problems associated with these joint tenancies include:
- The joint ownership means giving away part ownership of the property. The new owner can sell or mortgage his or her share -- or lose it in a lawsuit or divorce.
- You may have to file a gift tax return.
- The joint owner inherits all of the property after death; this may not be what the owner of the property intends.
- ↑ In addition to step-down valuation, it should also be noted that capital losses and carry over losses must be deducted on a decedent's final tax return and cannot be carried over in the following years. See Publication 544, Sales and Other Dispositions of Assets, IRS
References
- ↑ Is the money received from the sale of inherited property considered taxable income?, IRS
- ↑ 26 USC § 1014 - Basis of property acquired from a decedent, Legal Information Institute, Cornell University Law School
- ↑ 26 USC § 2032 - Alternate valuation, Legal Information Institute, Cornell University Law School
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