Close

Our Blog

IM电竞体育

Inheritances Enjoy a Special Tax Benefit
Article Highlights:
  • Stepped-Up Basis 
  • Inherited Basis 
  • Inheritance Basis Example 
  • Step Down Basis 
  • Long-Term Capital Gains Tax Rates 
  • Jointly Owned Property
  • Gifting Prior to Death 
You may hear people use the term “Stepped-Up Basis” that many believe is a tax provision that allows beneficiaries of an inheritance to reduce or even avoid taxes when and if they sell inherited property.

When an individual sells property, any gain from the sale of the property is taxable. The tax term “basis” is the value from which any taxable gain is measured. For personal use property or investment property the basis is generally the cost of the property. For business property the term basis is replaced with adjusted basis, which generally means the cost of the property reduced by business deductions, such as depreciation, attributable to the property.

However, for property received as a beneficiary the term inherited basis used. Tax law specifies that property received by a beneficiary as a result of an inheritance is the fair market value (FMV) of the property as of the decedent’s date of death. Since some property, such as real estate, generally appreciates over time, that means the property’s value will have increased, and the FMV on the date the decedent died will be higher than the decedent’s basis. Thus, the beneficiaries will inherit the property with a basis higher than the decedent’s, so they will have a stepped-up basis.

Example: Jack has owned a rental property for several years. He purchased it for $200,000 and over the years claimed a depreciation deduction of $24,000 up to the time of his death. Thus, his basis when he passed away was $176,000 ($200,000 - $24,000). At the time of Jack’s death, the rental had an appraised FMV of $400,000. Bill, Jack’s only beneficiary, will have a basis of $400,000, and if he immediately sells the rental for $400,000, he would not have a taxable gain. On the other hand, had Jack sold the property for $400,000 just before his death he would have had taxable gain of $224,000 ($400,000 - $176,000). (Sales expenses have been disregarded in this example.)

The example demonstrates the value of a beneficiary receiving a “stepped-up” basis. However, the actual term used in tax law is that the beneficiary receives the FMV at the date of the decedent’s death, so it is not always a stepped-up basis; there could be a step down in basis.

Another tax benefit of an inheritance is that a gain from the sale of inherited property is treated as being held long-term and gets the benefit from the lower long-term capital gain tax rates even though the property is not held by the beneficiary over one year.

Spousal Inheritances – Where spouses jointly own property a surviving spouse will sometimes only inherit half of the property since they already owned half, and thus only receive a basis adjustment on the inherited portion of a property. However, where the spouses live in a community property state, and the property is held as community property, the surviving spouse will get a basis reset to the FMV of the property for both the deceased spouse’s half they inherited and their own half.

Jointly Owned Property – Where two or more individuals own property as joint tenants and the joint tenants inherit a portion of the property from a deceased joint tenant, the beneficiary joint tenants only receive a basis adjustment on the inherited portion of the property.

In the case of inherited business property or rentals, a frequently asked question is what becomes of the accumulated depreciation on the inherited portion of jointly owned property? This is another benefit of inheritances as the accumulated depreciation goes away and the beneficiary, if using the inherited property for business purposes or as a rental, simply restarts the depreciation from scratch on the inherited portion.

Gifting Prior to Death – Another issue is that some individuals choose to gift property prior to death. This is commonly encountered by elderly parents gifting a home or rental to their children. When an individual receives a gift of property, the individual’s basis becomes the same basis as the giver’s basis. Therefore, there is no step-up in basis as previously discussed. So, unless there is some other underlying issue, generally it is not a good idea tax wise to make large gifts of property.

Example: Mom is in her 80s and her home, which she purchased for $100,000, has a current value of $300,000. She gifts the home to her only child, Joe, while she is still living. For gifts the gift recipient’s basis becomes the giver’s basis, and in Mom’s case her basis was $100,000 which becomes Joe’s basis. As a result of the gift Joe has a $200,000 built in gain when and if he sells the home. If Joe had inherited his Mom’s home, his basis would have been $300,000 plus any additional appreciation before her death.

As you can see, our tax laws are complicated when it comes to inheritances and gifts. It is generally good practice to pre-plan for inheritances and gifting. Call for a tax planning appointment if you would like assistance.


Have a Question About This Topic?

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the Terms of Use and Privacy Policy .

NEVER MISS A STORY.

Sign up for our newsletters and get our articles delivered right to your inbox.

Back to Article List

'); mywindow.document.write(data); mywindow.document.write(' '); mywindow.document.close(); // necessary for IE >= 10 mywindow.focus(); // necessary for IE >= 10 mywindow.print(); mywindow.close(); return true; } function quote_standard() { var miscellaneous=0; var formName = document.ioq; $('#print').show(); /* START GLOBAL VARIABLES ***************************************************************************/ // Federal var form1040 = Math.round(120*1.3); var form1040A = Math.round(100*1.3); var form1040EZ = Math.round(60*1.3); var form1040X = Math.round(200*1.3); // State var form140AZ = Math.round(70*1.3); var form140AZPY = Math.round(90*1.3); var form140X = Math.round(90*1.3); var otherStateIncomeTax = Math.round(80*1.3); // Income var w2 = Math.round(10*1.5); var form1099R = Math.round(10*1.3); var k1 = Math.round(40*1.3); // Schedules var scheduleA = Math.round(110*1.3); var scheduleB = Math.round(20*1.3); var scheduleC = Math.round(120*1.3); var scheduleD = Math.round(40*1.3); var scheduleE = Math.round(200); var scheduleF = Math.round(100*1.3); var scheduleH = Math.round(100*1.3); var scheduleL = Math.round(20*1.3); var scheduleM = Math.round(20*1.3); // Forms var form982 = Math.round(80*1.3); var form2106 = Math.round(50*1.3); var form2441 = Math.round(40*1.3); var form4137 = Math.round(40*1.3); var form4562 = Math.round(30*1.3); var form4684 = Math.round(50*1.3); var form4797 = Math.round(140*1.3); var form5405 = Math.round(80*1.3); var form5695 = Math.round(80); var form6252 = Math.round(80*1.3); var form8283 = Math.round(40); var form8379 = Math.round(40*1.3); var form8396 = Math.round(30*1.3); var form8606 = Math.round(30*1.3); var form8824 = Math.round(150*1.3); var form8829 = Math.round(130); var form8863 = Math.round(50*1.3); // Income documents var incomeDocuments = Math.round(60); var incomeDocumentsAnswer = "Yes"; /* CALCULATES QUESTIONS NUMBER 2 ********************************************************************/ if (formName.DoYouHaveAMortgage_0.checked == true) { var doYouHaveAMortgage = 230; var doYouHaveAMortgageAnswer = "Yes"; } else { var doYouHaveAMortgage = 130; var doYouHaveAMortgageAnswer = "No" } /* CALCULATES QUESTIONS NUMBER 3 ********************************************************************/ if (formName.W2_0.checked == true) { var w2 = parseInt(w2) * parseInt(formName.W2_0_yes.value); var w2Answer = "Yes"; } else { var w2 = 0; var w2Answer = "No"; } /* CALCULATES QUESTIONS NUMBER 4 ********************************************************************/ if (formName.SelfEmployed_0.checked == true) { var selfEmployed = 170 * parseInt(formName.SelfEmployed_0_yes.value); var selfEmployedAnswer = "Yes"; } else { var selfEmployed = 0; var selfEmployedAnswer = "No"; } /* CALCULATES QUESTIONS NUMBER 5 ********************************************************************/ if (formName.DidYouLiveOutsideOfArizona_0.checked == true) { var didYouLiveOutsideOfArizona = parseInt(formName.DidYouLiveOutsideOfArizona_0_yes.value * 190); //didYouLiveOutsideOfArizona=Math.round(didYouLiveOutsideOfArizona*1.3); var didYouLiveOutsideOfArizonaAnswer = formName.DidYouLiveOutsideOfArizona_0_yes.value; } else { var didYouLiveOutsideOfArizona = 100; didYouLiveOutsideOfArizona=Math.round(didYouLiveOutsideOfArizona*1.3); var didYouLiveOutsideOfArizonaAnswer = 1; } /* CALCULATES QUESTIONS NUMBER 6 ********************************************************************/ if (formName.DidYouSellInvestments_0.checked == true) { // alert("Your fees could vary significantly depending upon the number and type of transactions. We can give you a firm quote when we meet. This quote is an estimate."); // Captures the quantity value of the drop down and multiplies it times the price. var didYouSellInvestments = (parseInt(formName.ScheduleD.value) * 5) + 50; if (parseInt(formName.ScheduleD.value) > 40) { didYouSellInvestments=didYouSellInvestments+((parseInt(scheduleD)-40)*3); } didYouSellInvestments=Math.round(didYouSellInvestments*1.3); var didYouSellInvestmentsAnswer = "Yes"; } else { var didYouSellInvestments = 0; var didYouSellInvestmentsAnswer = "No"; } /* CALCULATES QUESTIONS NUMBER 7 ********************************************************************/ if (formName.DidYouOwnRentalProperty_0.checked == true) { // Captures the quantity value of the drop down and multiplies it times the price. var didYouOwnRentalProperty = parseInt(scheduleE) * parseInt(formName.ScheduleEOwn.value); var didYouOwnRentalPropertyAnswer = "Yes"; } else { var didYouOwnRentalProperty = 0; var didYouOwnRentalPropertyAnswer = "No"; } if (formName.DidYouSellRentalProperty_0.checked == true) { // Captures the quantity value of the drop down and multiplies it times the price. var didYouSellRentalProperty = 250 * parseInt(formName.ScheduleESell.value); var didYouSellRentalPropertyAnswer = "Yes"; } else { var didYouSellRentalProperty = 0; var didYouSellRentalPropertyAnswer = "No"; } /* CALCULATES QUESTIONS NUMBER 9 ********************************************************************/ if (formName.ChildCare_0.checked == true) { var childCare = parseInt(form2441); var childCareAnswer = "Yes"; } else { var childCare = 0; var childCareAnswer = "No"; } /* CALCULATES QUESTIONS NUMBER 11 ********************************************************************/ if (formName.EnergyCredit_0.checked == true) { var energyCredit = parseInt(form5695) * parseInt(formName.EnergyCredit.value); var energyCreditAnswer = "Yes"; } else { var energyCredit = 0; var energyCreditAnswer = "No"; } /* CALCULATES QUESTIONS NUMBER 12 ********************************************************************/ if (formName.DonateNonCash_0.checked == true) { var donateNonCash = parseInt(form8283); var donateNonCashAnswer = "Yes"; } else { var donateNonCash = 0; var donateNonCashAnswer = "No"; } /* CALCULATES QUESTIONS NUMBER 13 ********************************************************************/ if (formName.BusinessUseOfHome_0.checked == true) { var businessUseOfHome = parseInt(form8829) + ((parseInt(formName.BusinessUseOfHome_0_yes.value) * 80) - 80); var businessUseOfHomeAnswer = "Yes"; } else { var businessUseOfHome = 0; var businessUseOfHomeAnswer = "No"; } /* CALCULATES QUESTIONS NUMBER 14 ********************************************************************/ if (formName.BusinessUseOfHome_0.checked == true) { var businessUseOfHome = parseInt(form8829) * parseInt(formName.BusinessUseOfHome_0_yes.value); var businessUseOfHomeAnswer = "Yes"; } else { var businessUseOfHome = 0; var businessUseOfHomeAnswer = "No"; } /* CALCULATES QUESTIONS NUMBER 15 ********************************************************************/ if (formName.CollegeTuition_0.checked == true) { var collegeTuition = parseInt(form8863) * parseInt(formName.Tuition_0_yes.value); var collegeTuitionAnswer = "Yes"; } else { var collegeTuition = 0; var collegeTuitionAnswer = "No"; } /* CALCULATES QUESTIONS NUMBER 16 ********************************************************************/ if (formName.IncomeDocuments_0.checked == true) { var incomeDocuments = parseInt(incomeDocuments); var incomeDocumentsAnswer = "Yes"; } else { var incomeDocuments = 0; var incomeDocumentsAnswer = "No"; } // Calculate the subtotal var subtotal = parseInt(doYouHaveAMortgage + w2 + selfEmployed + didYouLiveOutsideOfArizona + didYouSellInvestments + didYouOwnRentalProperty + didYouSellRentalProperty + childCare + energyCredit + donateNonCash + businessUseOfHome + collegeTuition + incomeDocuments); // create answer text var doYouHaveAMortgageAnswer = "2. Mortgage? " + doYouHaveAMortgageAnswer + " $" + doYouHaveAMortgage; var w2Answer = "3. W-2, 1099-R, SSA-1099, K-1 forms? " + w2Answer + " $" + w2; var selfEmployedAnswer = "4. Self-Employed? " + selfEmployedAnswer + " $" + selfEmployed; var didYouLiveOutsideOfArizonaAnswer = "5. State Returns: " + didYouLiveOutsideOfArizonaAnswer + " $" + didYouLiveOutsideOfArizona; var didYouSellInvestmentsAnswer = "6. Sold Investments? " + didYouSellInvestmentsAnswer + " $" + didYouSellInvestments; var didYouOwnRentalPropertyAnswer = "7a. Owned Rental Property? " + didYouOwnRentalPropertyAnswer + " $" + didYouOwnRentalProperty; var didYouSellRentalPropertyAnswer = "7b. Sold Rental Property? " + didYouSellRentalPropertyAnswer + " $" + didYouSellRentalProperty; var childCareAnswer = "8. Child Care? " + childCareAnswer + " $" + childCare; var energyCreditAnswer = "9. Energy Credit? " + energyCreditAnswer + " $" + energyCredit; var donateNonCashAnswer = "10. Donated more than $500? " + donateNonCashAnswer + " $" + donateNonCash; var businessUseOfHomeAnswer = "11. Business-use-of-home? " + businessUseOfHomeAnswer + " $" + businessUseOfHome; var collegeTuitionAnswer = "12. College Tuition? " + collegeTuitionAnswer + " $" + collegeTuition; var incomeDocumentsAnswer = "13. Earned Income Credit " + incomeDocumentsAnswer + " $" + incomeDocuments; // Check if existing client box is checked if (formName.ExistingClient_0.checked == true) { var existingClientAnswer = "1. Existing client? Yes"; var discount = parseInt(subtotal * .10); } else { var existingClientAnswer = "1. Existing client? No"; var discount = parseInt(subtotal * .20); } // Dependent discount check if (formName.DependentDiscount_0.checked == true) { var dependentDiscount = parseInt(subtotal * .5); var dependentDiscountText = "
Dependent Discount: -$"+ dependentDiscount; } else { var dependentDiscount = 0; var dependentDiscountText = ""; } var breakdown = existingClientAnswer + "
" + doYouHaveAMortgageAnswer + "
" + w2Answer + "
" + selfEmployedAnswer + "
" + didYouLiveOutsideOfArizonaAnswer + "
" + didYouSellInvestmentsAnswer + "
" + didYouOwnRentalPropertyAnswer + "
" + didYouSellRentalPropertyAnswer + "
" + childCareAnswer + "
" + energyCreditAnswer + "
" + donateNonCashAnswer + "
" + businessUseOfHomeAnswer + "
" + collegeTuitionAnswer + "
" + incomeDocumentsAnswer; var quote = breakdown + "
--------------------
Subtotal: $" + parseInt(subtotal) + "
Discount: -$" + parseInt(discount) + dependentDiscountText + "
--------------------
Total Only $" + parseInt(subtotal - discount - dependentDiscount + miscellaneous) + "! "; document.getElementById('quotearea').innerHTML=quote+'

If you have other transactions not mentioned above, your fees will be higher. This quote is an estimate. Please print this quote and bring it with you to your appointment. You must have a completed tax organizer to get the discount.'; return false; }