What is the Tax Basis of Inherited Property

What Are The Advantages of Inherited Property
The tax advantage that someone gets for leaving their heirs property when they die is that the tax basis for the inherited property is the value at their death or alternate valuation date, income tax is completely avoided on the appreciation in value that occurred while they owned the property.

What are the Special Rules for Property Inherited from Individuals dying in 2010
The basis of inherited property changes based on special rules to property acquired from a decedent who died in 2010. Heirs of individuals who die in 2010 may get a full stepped-up basis, only a partial step-up in basis, or a carryover basis depending on whether the executor made a special election to avoid estate tax for the estate.

To learn about the step up in basis at death of inherited property acquired from a decedent dying in 2010, click here.

If you inherited property from a decedent who died before 2010 or after 2010, your basis on inherited property is generally as follows below:

Basis of Inherited Property
Your basis of inherited property from a decedent is generally one of the following:

  • The FMV (Fair Market Value) of the property at the date of the individuals death.
  • The FMV on the alternate valuation date, if so elected by the personal representative for the estate.
  • The value under the special-use valuation method for real property used in farming or other closely held business, if so elected by the personal representative.
  • 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.

As mentioned above, the basis for inherited property is generally the fair market value of the property at the date of the decedent’s death, regardless of when you acquire the property

If a federal estate tax return does not 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.

Exception for Appreciated Property
If you or your spouse gave appreciated property to an individual during the 1-year period ending on the date of that individual’s death and you (or your spouse) later acquired the same property from the decedent, your basis in the property is the same as the decedent’s adjusted basis immediately before death, not its fair market value.

Appreciated property is any property whose fair market value on the day it was given to the decedent is more than its adjusted basis.

Community Property
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife 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 includable in the decedent’s gross estate, whether or not the estate must file a return.

When your spouse dies in a community property state, one-half of the fair market value of the community property is generally included in the deceased spouse’s estate for estate tax purposes. The surviving spouse’s basis of inherited property for his or her half of the property is 50% of the total fair market value. For the other half, the surviving spouse, if he or she receives the asset, or the other heirs of the deceased spouse have a basis equal to 50% of the fair market value.

Basis of Inherited Property Example: Mike and Lisa owned community property that had a basis of $180,000. When Lisa died, half of the fair market value of the community interest was includible in Lisa’s estate. The fair market value of the community interest was $250,000. The basis of inherited property of Mike’s half of the property after the death of Lisa is $125,000 (half of the $250,000 fair market value). The basis on the other half to Lisa’s heirs is also $125,000.

Property Held by Surviving Tenant
If you are a surviving joint tenant, your basis for the property depends on how much of the value was includible in the deceased tenant’s gross estate, and this depends on whether the joint tenant was your spouse or someone other than your spouse.

Basis of Inherited Property Example: Nathan and Chuck owned, as joint tenants with right of survivorship, business property they purchased for $30,000. Nate furnished two-thirds of the purchase price and Chuck furnished one-third. Depreciation deductions allowed before Nathan’s death were $12,000. Under local law, each had a half interest in the income from the property. At the date of death, the property had a fair market value of $60,000, two-thirds of which is includable in Nathan’s estate. Chuck figures his basis in the property at the date of Nathan’s death as follows:

Interest Chuck bought with his
own funds - 1/3 of $30,000 cost:
$10,000
Interest Chuck received on Nathans death - 2/3 of $60,000 fair market value
$40,000
$50,000
Minus: 1/2 of $12,000 depreciation before
Nathan's death
$ 6,000
Chuck's basis at the date of Nathan's death $44,000

If Chuck had not contributed any part of the purchase price, his basis of inherited property at the date of Nathan’s death would be $54,000. This is figured by subtracting from the $60,000 fair market value, the $6,000 depreciation allocated to Chuck’s half interest before the date of death.

If under local law Chuck had no interest in the income from the property and he contributed no part of the purchase price, his basis of inherited property at Nathan’s death would be $60,000, the fair market value of the property.

Click here for more information regarding the Tax Basis of Inherited Property from the IRS website.

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