Estate tax

Inherited Property: What’s the Cost Basis?

Prior to 2010, the tax law provided that any property received as an inheritance would receive a “stepped-up” basis.  What this meant was that a beneficiary’s cost basis was generally the fair market value of the asset as of the date of death of the owner.  For example, let’s assume that your great uncle passed away in 2009 and left you 1000 shares of XYZ Company.  Your uncle purchased these shares many years ago at $1 per share and the market value on the date of his death was $100 per share.  If your uncle had sold these shares prior to his death he would have realized a large capital gain.  Would you be now subject to the same taxable gain when you sold the stock?  The answer is no.  As the recipient of the stock as a bequest, your cost basis is stepped-up to $100 per share.  So if upon receipt of the stock you immediately sold it at $100 per share, you would have no capital gain.  The gain has escaped taxation forever.

What if your uncle made you a gift of the stock prior to his death?  In this case, the “step-up” in basis (from $1 to $100 per share) would be lost. Property that has gone up in value acquired by gift is subject to the “carryover” basis rules: the donee takes the same basis the donor had in it (just $1), plus a portion of any gift tax the donor pays on the gift.

Because there was no estate tax in 2010, separate rules apply to property inherited from someone that died last year.  In general, the carryover basis rule would apply, meaning that the property received would not be stepped up to date of death values.  However, the law allows for a “stepped-up” basis for $1,300,000 in appreciated estate assets.  (Note- a higher amount is allowed for assets passed to a surviving spouse).  

Also note that the fair market value basis rules apply to inherited property that’s includible in the deceased’s gross estate, whether or not a federal estate tax return was filed, and those rules also apply to property inherited from foreign persons, who aren’t subject to U.S. estate tax. The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his inheritance. So it is critical that you consult your tax advisor before changes are made to the ownership of assets owned by your parents or other relative.

Schanel & Associates, PA, Certified Public Accountants, located in Jupiter, FL, provides tax, accounting, and consulting services to clients throughout Palm Beach County, including Palm Beach Gardens, North Palm Beach and Juno Beach, and throughout South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Potential estate tax benefit of a Roth conversion

Generally the Roth conversion analysis is discussed in terms of income tax savings. However, for large estates, there is a possible estate tax benefit as well.