There are several ways to determine the tax basis of
Inherited Property from a decedent.



Advantage 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.


Basis of Inherited Property
Your basis for 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 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.

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 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. 

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: Interest Chuck received on Nathans death - 2/3 of $60,000 fair market value Minus: 1/2 of $12,000 depreciation before Nathan's death Chuck's basis at the date of Nathan's death

$10,000 $40,000                $50,000 $ 6,000                $44,000

If Chuck had not contributed any part of the purchase price, his basis
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 at Nathan's
death would be $60,000, the fair market value of the property.




Click here to leave inherited property tax basis and return to depreciation basis.