What If You Inherit A Property?

Have you inherited a property? There’s an incredible benefit to people who have inherited property, known as “stepped-up basis”. Not only do they receive the property itself, but the basis or cost value of the property becomes the fair market value at the time of the decedent’s death. What does this mean? It avoids the recognization of gain between the decendent’s cost and what the property is worth once it’s inherited.

Hypothetically – if a person had purchased a home for $100,000 and passed away 20 years later, that property is worth about $500,000. This means there is a potential gain on the property of $400,000. However, due to the tax provision known as a step-up tax basis, the person inheriting the property will have a basis of the fair market value at the time of death.

What does that mean? Simply, you, the recipient, could sell the property for $500,000 and have no taxable gain on the sale.

At the time of the decendent’s death, a formal appraisal is the most reliable and defensible estimate of the fair market value of the property. There will be a fee of several hundred dollars for the appraisal however. But, there is another alternative – get a broker’s opinion of value in writing. You actually would want to consider getting about 3 of those opinions, which will give you a good idea of they are all similar. That report should rely on comparable sales, which would justify their position. But whichever way you decide to get this information, the IRS will accept both methods.

Have you heard the discussion from the current President about the possibility of eliminating the step-up basis which allows families to leave assets to their heirs without having to pay capital gains? Some people are considering that to be a “tax loophole” for the ultra-rich, but it can definitely impact ordinary people who inherit a property and don’t want to have to sell it.

Here’s an example: let’s say there is a family farm which was inherited by the heirs who cannot afford to pay the capital gains tax at the time of transfer. They could be forced to sell the property or borrow the money to pay the tax, assuming that was an even possible option.

When it comes to federal estate tax, that is paid directly from the deceased’s remaining estate – not the heir. So if the decedent’s estate is getting close to the limit before estate taxes are due, currently $11.7 million, you should consider professional tax advice as there could be additional provisions in play. If you need more information, IRS.gov is a great resource.

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