When you drive around older neighborhoods, you see homes in original condition or in a state of disrepair, which are signs of senior homeowners. It makes you think, “They should sell and move – are they just waiting around to die?”
The answer is YES, and it’s because of how the IRS taxes the gain from the sale of your home. Once a property is inherited, the tax basis is stepped up to fair-market value.
Excerpted from the IRS website:
The basis of property inherited from a decedent is generally one of the following.
- The FMV of the property at the date of the individual’s death.
- The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. For information on the alternate valuation date, see the Instructions for Form 706.
- The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. This method is discussed later.
- The decedent’s adjusted basis in land to the extent of the value excluded from the decedent’s taxable estate as a qualified conservation easement. For information on a qualified conservation easement, see the Instructions for Form 706.
If a federal estate tax return doesn’t have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.
For more information, see the Instructions for Form 706.
The above rule doesn’t apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent’s death. Your basis in this property is the same as the decedent’s adjusted basis in the property immediately before his or her death, rather than its FMV. Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis.
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married individuals are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in the decedent’s gross estate, whether or not the estate must file a return.
For example, you and your spouse owned community property that had a basis of $80,000. When your spouse died, half the FMV of the community interest was includible in your spouse’s estate. The FMV of the community interest was $100,000. The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). The basis of the other half to your spouse’s heirs is also $50,000.
For more information on community property, see Pub. 555, Community Property.