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Stepped-up Basis - Estate Related Questions

Do you need to know what stepped-up basis is regarding estate law? Or, how does this kind of basis benefit heirs? When a loved one passes away and property is to be inherited it is common for questions to arise. It can be difficult to have clarity about this subject without the help of Experts. If you are looking for additional information then read below for questions answered by verified legal Experts.

What is stepped-up basis?

Basis refers to an asset’s cost for the goal of calculating taxes and capital gains. When a person passes away, the Internal Revenue Service (IRS) increases the property’s basis up to the fair market value at the time of the death. For example, if someone purchased a house for $50,000 but at the time of their death it was worth $200,000 the IRS would value the house at $200,000 for capital gains reasons. So if the property was sold at the time of death or shortly thereafter at that price then no capital gains or income tax would be due.

In Pennsylvania, how long is a stepped-up basis valuation valid when determining tax liability from proceeds from the sale of an inherited property?

The basis of property that is garnered by inheritance or by intestate succession is the fair market value at the time of death is called stepped-up basis. In some states, such as Pennsylvania, the alternative six month period after death valuation, that is allowed under Federal law, is not recognized. 

Would a person that wants to sell their inherited property have to pay capital gains?

There is a benefit to an heir that is inheriting property such as stocks, real estate, etc. Receiving a stepped-up basis for inherited property is the benefit. This is the value of the inherited property at the time of the grantor’s death so that any gain that may have occurred up until that time is wiped clean. The heir essentially steps into the new basis which is the fair market value on date of death. Any sale after the death will result in a capital gain only if the inherited property appreciates past the stepped-up basis at death.

Is it better to sell real property that is in trust before or after the person giving the property passes?

If the deceased person was living in the home for at least two of the last five years then it could be sold and up to $250,000 would be exempt in gains per the homestead capital gains exemption. But if the property was not inhabited by the decedent within the last three years the exemption would be lost. If the property is sold after the death then the property would receive a stepped-up basis equal to the fair market value from the date of death. If the heirs or beneficiaries of the trust sold it quickly after the death they could take advantage of the step up in basis and avoid capital gains.

If an inherited item such as jewelry is sold what are the tax obligations on the proceeds from that sale?

Any tax obligations would be based upon a stepped-up basis. The value of the jewelry when it was purchased would no longer matter but instead the value at the time of death would prevail. A jewelry appraiser can determine the value at the time of death. If the death was recent then likely there is very little or no gain involved and therefore no tax obligation. If, however, the death was not so recent then the heir would be taxed on any gain that may occur due to a rise in the value. If there is “gain” it is to be reported on Form 1040 Schedule D.

Property can have many different kinds of values. However, as seen in the examples above a stepped-up basis is the value of property (inherited, in trust, etc.) at the time of a person’s death. It can be overwhelming dealing with such property without fully having a clear understanding on how the value is determined. Verified Experts are available day and night to answer any questions so that you have clarity.

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