When
you inherit property, such as a house or stocks, the property is usually worth
more than it was when the original owner purchased it. If you were to sell the
property, there could be huge capital gains taxes. Fortunately, when you
inherit property, the property’s tax basis is "stepped up," which
means the basis would be the current value of the property.
Scenario: You inherited property
that has greatly appreciated in value. Now what? The transfer of any asset from
an estate to an heir can trigger tricky tax issues. Sometimes things can get
even more difficult when it comes to a tricky tax like the capital gains tax,
so it is worth knowing the ground rules ahead of time.
ElderLawAnswers.com recently considered this subject and the key
rules of thumb in an article titled “Do You Pay Capital Gains Taxes on Property
You Inherit?”
In the normal course of things
post-mortem, the estate pays any state and federal estate taxes, then the heirs
might even pay a state inheritance tax. Thereafter, if the heirs sell any
inherited asset, then they may not pay any capital gains taxes if the asset is
sold at or below its date of death value. This is the magic of what is called
the “stepped-up basis.”
Capital gains are always
measured by the “basis”, or the original value to the person being taxed (that
is how you measure appreciation, after all). This becomes tricky, however, if
the asset in question is “gifted” to an heir while the owner is alive. When
this occurs, then the heir is stuck with the original “basis” of the one who
gifted the asset.
For example, a home purchased in
1972 and “gifted” in 2013 most certainly will have substantial appreciation
given real estate values over 40 years. If the home is later sold by the donee,
then substantial capital gains taxes will be owed.
On the other hand, the same home
inherited in 2013 by the same heir can be sold with some 40 years of
appreciation stepped-up to current fair market value and sold with minimal, if
any, capital gains taxes owed.
The capital gains tax is
anything but simple. Accordingly, consider this a brief introduction to a
complex subject. The simple point to take away is that the timing of wealth
transfer has serious tax consequences.
Fortunately, capital gains taxes
can be minimized, if not prevented.
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Reference: ElderLawAnswers.Com
(August 7, 2013) “Do You Pay Capital Gains Taxes on Property
You Inherit?”