The other day, I used the term ‘die correctly’, which refers to those who hold properties until death, allowing those who inherit to step up the tax basis.
Under IRC § 1014(a) the general rule applied to property a beneficiary receives from a benefactor is that the beneficiary’s tax basis equals the fair market value of the property at the time the decedent dies. For example, Decedent owns a home they originally purchased for $35,000. Their tax basis in the home is equal to its cost, $35,000, assuming no adjustments under IRC § 1016. On the day Decedent dies, the fair market value of the home is $200,000. If Decedent bequeaths the home to Beneficiary, Beneficiary’s basis in the home will be the fair market value, $200,000.
In contrast, had Decedent given the home to Beneficiary before their death, Beneficiary would receive a carryover basis, which would be equal to the decedent’s adjusted basis in the home, $35,000.
Because of this provision, any appreciation of the affected property that occurred during the decedent’s lifetime will never be taxed. Thus, this provision provides an incentive for taxpayers to retain appreciated property until death.
As the baby boomer generation begins to expire, we should see more inventory – especially rental properties. Any houses within a few miles of the coast are already in record territory, price-wise, and the beneficiaries would be smart to liquidate at least some of the properties while they can get top dollar.
The ones to sell would be the older homes needing more work, and/or those in inferior locations. Keep the best, and sell the rest!
If you are thinking of selling, give me a call!