· What is a step-up in basis, and why is it important?
In general terms, basis is your attributed cost of a particular asset. Usually this is the purchase price. Gain or loss on the sale of an asset for tax purposes is computed by subtracting your basis from the sales price. When you receive assets as a result of another person’s death, your basis in the assets received is “stepped up” to the value of the assets at the date of death or, in some cases, the date that is 6 months after the date of death. This results in a very large tax savings when highly appreciated property is inherited.
For example, Mrs. A owns a stock at her death which she purchased for $1 but which is now worth $10. If she sold it for $10 while alive, she would have a $9 taxable gain. The $9 gain is the difference between the basis of $1 and the current value of $10. However, at Mrs. A’s death, the stock is valued at $10 for federal estate tax purposes. In other words, the $1 basis is stepped up to the current value of $10 at her death. Therefore, if Mrs. A’s heirs sell it for $10, they will pay no income tax because the stepped-up $10 basis is the same as the current $10 value.
· Is there a step-up in basis on assets I give away before my death?
Under the Internal Revenue Code rules, property that is given to an-other has a “carryover” basis. This means that the cost basis of an asset in the hands of the recipient is the same as the cost basis was in the hands of the donor. To receive a step-up in basis, property must be included in the decedent’s estate.
· If my husband dies and we have jointly held property, do I get a step-up in basis?
If you purchased the property after 1966 and before 1982, you could get a 100 percent step-up in basis if your husband purchased the prop-arty himself. Outside that period, you would normally be entitled to a step-up in basis on one-half of the property.
· Are the step-up-in-basis rules different for property held in joint tenancy with right of survivorship when the owners are not married?
Yes, they are, and they are complex. If property is held jointly between persons who are not married and one of the owners dies, there are several possible outcomes, as follows:
If the joint owner who died paid for the entire property, the full value of the property is included in the deceased owner’s estate. The property receives a 100 percent step-up in basis. For example, if Mrs. A owned stock, put it in joint tenancy with her daughter, and subsequently died, the full value of the stock would be included in Mrs. A’s estate. Her daughter would then inherit the property with a 100 percent step-up in basis.
If both joint owners contributed to the value of the asset, the value of the deceased joint owner’s share is included in his or her estate. That portion of the property receives a step-up in basis. If Mrs. A and her daughter bought stock for which Mrs. A paid 60 percent and her daughter paid 40 percent, then 60 percent of the value of the stock would be included in Mrs. A’s estate and would receive a step-up in basis.
If the joint owners received the property by gift or inheritance, only the decedent’s portion is included in his or her estate. For example, if three children inherited real estate from a parent and the property was jointly held by all three, one-third of the value of the property would be included in the estate of a child who dies. This one-third interest would receive a step-up in basis.
These examples represent the general rules for step-up in basis. Other consequences may occur depending on the situation. Before you make any gift, especially if it is to be titled in joint tenancy with right of survivorship, you should consult your attorney.
· What if my spouse and I own property together in a community property state?
Community property receives a 100 percent step-up in basis on the death of either spouse. It does not matter which spouse dies first; all of the community property will receive a new basis equal to its fair market value as valued for estate tax purposes.
· If I am terminally ill, can my brother give property to me which I can then leave to him so that he can get a 100 percent step-up on my death?
Some individuals who know about the step-up-in-basis rules try to take advantage of them when they find that family members or friends are about to die. A person will give property to the dying person with the agreement that the dying person, in his or her will or trust, will leave that same property to the person who gave it. The result these people are looking for is a 100 percent step-up in basis.
To prevent such transactions, the Internal Revenue Code contains a provision that denies a stepped-up basis for any property which was transferred to a decedent within 1 year of his or her death and which is returned to the donor after the decedent’s death.
· I own an annuity and a lift insurance policy on my spouse’s life. Will these items receive a step-up in basis at the time of my death?
Generally, neither the annuity nor the cash value in the life insurance policy you own on the life of your spouse will receive a step-up in basis at the time of your death. There could, however, be an effective adjustment to basis in circumstances where your estate incurs an estate tax and these items contribute to that estate tax liability
· Doesn’t the gift of appreciated assets generate capital gain tax at the time of the gift?
No. A capital gain is triggered only when an asset is sold. Thus, there is no capital gain tax when you make a gift of an appreciated asset, but if the recipient later sells the gift, his or her gain will be taxed.
· What is capital gain?
Capital gain is the profit an owner realizes on the sale of investment property, such as real estate, stocks, art, or collectibles. Simply put, it is the difference between the price paid for an item and the price it is ultimately sold for.
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