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.
From wiki:
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!
I read somewhere and the rule was exactly the opposite of what you reiterated about tax basis for real estate bequeath: giving away properties while alive the tax is based on the current market value whileas if leave them in a will it is based on the purchase price. I read it online and you know how reliable that is…
great information jim.
something is not making sense here.
“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.”
Wouldn’t this provision provide an incentive to get rid of the property to beneficiary before death if you are thinking about future taxes?
Wouldn’t this provision provide an incentive to get rid of the property to beneficiary before death if you are thinking about future taxes?
Not if the goal is to avoid paying taxes.
Plenty of people need the money and sell before they die, and they have to pay capital-gains tax on the net gain if they haven’t lived in the home for 2 out of the last 5 years.
But if you don’t need the money before you die, it is better to “die correctly” and have your beneficiaries then inherit the property. The IRS will consider the tax basis the same as the actual value on the date of death.
Using the example given, if the new tax-basis is $200,000, and the beneficiary waits a year after the death before selling and gets $220,000 for it, then they owe tax on the additional $20,000.
I read somewhere and the rule was exactly the opposite
My internet is better than your internet 😆
Check with your lawyer, and update the family trust while you are at it!
All property transferred without consideration, whether as a gift or from an estate, gets a step-up. Think of an estate as somebody’s “final gift” (referring to SoCal comment)
Beneficiaries always take fair market value at the time of receipt of property, hence the term “step-up”. The estate or individual giving the property is also exempt from gift/estate tax if the lifetime exemption hasn’t been exceeded ($5,340,000 for 2014)
I like that angle, and a great solution for those with a sub-$5 million estate.
If Pops needs the dough but detests the thought of paying tax, then gift to a kid and have him or her sell it.
well if you never plan on selling the property and giving it to someone than it seems like a no brainer to do it before death. If you are worried about paying taxes on a sale before your dead than the beneficiaries no need to worry about cost basis.
The whole article seemed to revolve around the cost basis of the property when it is given to someone else before or after death.
Not if total estate exceeds tax-free limit, which for some is only their residence, savings, and a couple of condos if they are coastal.
I was hoping to revolve the article around a category that could deliver more inventory in the near future!
I promise not to complain about that pesky $5,340,000 as there are ways.
I am hoping to enjoy this bit of tax law in two weeks or less. Or less meaning heads will role. You need not be the sole beneficiary. You can purchase the property out of the estate at the stepped up basis. The money goes into the cash the executor has to disperse and magically a portion of the sale reappears. Lawyers… don’t get me started. Tax lawyers… other lawyers hold them in similar regard.
A certified estate planner checked in and said Guy’s understanding is incorrect. Can more people comment with their thoughts? T-shirts in the mail!
On a tangent, I am confused about the property tax assessment. In an inheritance in California (prop 13) the assessment stays where it was for the heirs, but I was talking to someone who inherited a portion of an uncle’s house they got reassessed up to present value. Anyone know the rules on this?
My primitive understanding is this:
If you deed the property (or include them on the deed) while living, upon your death your heirs will own the property with the current cost basis and property tax basis (assessment). The result being that they will pay low property taxes and high cap gains upon sale.
If you bequeath the property to your heirs upon your death, they will own the property with a stepped up cost basis and property tax basis, both determined by a reassessment. The result being that they will pay higher property tax and lower cap gains upon sale.
All of this is subject to the primary residence exclusion and lifetime gift tax. Again, I’m the opposite of an expert on this.
Hi Jim and fellow readers,
I was telling Jim that I’ve been a reader for nearly a decade and have probably read 95% of the posts during that time. I’m up in the Long Beach area otherwise would have definitely used Jim on a few transactions.
Bubbleinfo.com helped save my brother (also my business partner) and I from making bad moves in the mid-2000’s and led to some modestly good moves during the 2009-2012 bottom.
I’m an estate planning attorney (board certified specialist), so was reading this thread with interest.
Jim is right and I disagree with Guy S’s take.
Guy S is correct that there is no estate tax (40%) on any transfers of assets during life or death so long as the total transfer per person is under the current exemption amount ($5.34M — rising annually with CPI). However, Jim is right to say the “right” or best way to transfer assets is to do so upon death. That way, the recipient gets a capital gains step-up to the market value at the death of the transferor.
For example, if Jim bought a property in 1975 in Carlsbad for $200K and gives it to Kayla in 2014 (current market value is $1.2M), there is no tax on the transfer itself. However, because Kayla got the house during Jim’s life, she receives it with his $200K basis. If she sells the property right after receiving it, she’s going to have a capital gains issue (call it 15-25%) on the difference between the basis on and the current sales price.
When we are doing estate planning for high net worth individuals who are thinking of transferring/gifting property to their kids during their life, we don’t like to transfer assets with low cost basis because we are setting their kids up for an avoidable capital tax problem if we do so.
As for Dave C’s question, children get to keep the existing property tax basis for the family residence PLUS up to $1M of assessed (not appraised — big difference) value per parent. This doesn’t work for cousins, nephews, etc. Tricky rules. work with a good estate planning attorney.
Hi Curtis and thank you for that great information. So, if I read you correctly is it correct to say that property transferred on death gets a stepped up cost basis for the purposes of cap gains AND gets to keep the existing low property tax basis? Thank you again and sorry for my confusion on this.
Yea, thanks Curtis.
Yes, thank you Curtis for great professional insight!
Rely on your own tax advisor – he/she will be the one to get you out of trouble if you get audited! Get good help!
Yes booty juice. That’s correct IF it’s being transferred at death to children (not other relatives or friends) and so long as it’s the primary residence or up to first $1m of assessed value if other property