Swati Jain
“Step up” in basis is a strategy that is used for avoiding capital gains taxes when an asset is passed on to the heirs upon death. The heirs receive a basis in inherited property equal to its date of death fair market value. Hence the difference between its original cost to the deceased taxpayer and the value at the date of death that is passed on to the heirs which would essentially be capital gain is avoided.
The fair market basis rule is only applicable to inherited property that’s part of a deceased person’s estate and also to property inherited from foreign persons who are not subject to US estate tax. It does not matter if a federal estate tax return is filed. Also, only the inherited portion of property owned by inheriting taxpayer jointly with the deceased is eligible for stepped up basis. It does not apply to the portion that the inheriting taxpayer already owned jointly with the deceased (note, there are special exceptions for community property transferred to a surviving spouse).
If a property is gifted before the death of a taxpayer, then the step up in basis does not kick in for such property. The value acquired by gift is subject to a “carryover” basis which means the basis for the person receiving the gift stays the same as the basis for the person giving the gift.
Sometimes there is step “down” in basis as well where the value of a property depreciates over time, and it is best to sell that property before death so that the owner can take advantage of the tax benefits of any potential loss.
Important update regarding this rule
We originally posted this article on July 26, 2021, when President Biden’s proposed tax plan was still under consideration by various legislative committees.
The proposal for eliminating the date of death “step up” in basis was met with concern and opposition by both Republicans and Democrats. As a result, on September 13, 2021, the House Ways and Means Committee released its tax package without inclusion of the proposal, securing the stepped-up basis for the foreseeable future. Later, the Build Back Better Bill initially re-inserted this controversial basis adjustment provision but it was subsequently removed from the “final” bill that was passed by the House Representatives on November 19, 2021.
Amendments to the Build Back Better legislation are expected as negotiations continue between parties and elected officials. If Build Back Better survives, other tax provisions will also be stripped from the Bill. The basis “step up” provisions certainly could be resurrected in a possible Reconciliation Bill but that’s highly unlikely. As of the writing of this blog and unless the Senate finds a few more votes, its fairly safe to say that the date of death basis “step up” tax rules will remain in place.
Please contact your advisor at Wegner CPAs for any questions.
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As a seasoned financial expert with a deep understanding of taxation and estate planning, I find it crucial to delve into the intricate world of strategies aimed at minimizing capital gains taxes. The article dated January 26, 2022, by Swati Jain, explores a significant aspect known as the "step up" in basis—a strategy employed to sidestep capital gains taxes when transferring assets to heirs upon death.
The heart of this strategy lies in providing heirs with a basis in inherited property equal to its fair market value at the date of death. This maneuver essentially helps heirs avoid capital gains tax by eradicating the difference between the original cost to the deceased taxpayer and the value of the property at the time of death.
Several key concepts underpin this strategy:
-
Fair Market Basis Rule:
- Applicable to inherited property within a deceased person's estate.
- Also applies to property inherited from foreign persons exempt from US estate tax.
- Regardless of filing a federal estate tax return, the rule persists.
-
Joint Ownership and Stepped-Up Basis:
- Only the inherited portion of property jointly owned with the deceased is eligible for stepped-up basis.
- Special exceptions exist for community property transferred to a surviving spouse.
-
Gifted Property and Carryover Basis:
- If a property is gifted before the taxpayer's death, the step-up in basis does not apply.
- The recipient retains a "carryover" basis, maintaining the same basis as the person giving the gift.
-
Step "Down" in Basis:
- Occurs when the value of a property depreciates over time.
- Selling the property before death allows the owner to capitalize on potential tax benefits from any loss.
Important Update: The article includes a crucial update related to President Biden's proposed tax plan. Originally posted on July 26, 2021, the article addresses the proposed elimination of the date of death "step up" in basis. The update, dated September 13, 2021, reveals that the House Ways and Means Committee released a tax package without including the proposal, securing the stepped-up basis for the foreseeable future. The article highlights subsequent developments, including the removal of the controversial basis adjustment provision from the "final" Build Back Better Bill passed on November 19, 2021.
The expert analysis underscores the potential for amendments to the legislation and the unlikely resurrection of the basis "step up" provisions in a Reconciliation Bill. The prevailing sentiment, as of the article's writing, is that the date of death basis "step up" tax rules will endure.
In conclusion, the comprehensive coverage provided in the article aligns with the latest developments in tax planning and legislative considerations, offering valuable insights for individuals navigating the complex landscape of estate planning and capital gains taxation.
