On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
When an asset is sold, the owner owes capital gains tax on the profit. For these purposes, “profit” is the excess of the sales price over the owner’s tax basis in the property. If the owner bought the property, his or her tax basis is generally equal to what he or she paid for it. Under the current rules, a beneficiary who inherits an asset is generally allowed to use the asset’s value on the date the deceased owner died as his or her tax basis in the asset. Because of this “step up” or “step down” in basis, only the post-death appreciation is subject to income tax if the beneficiary decides to sell the asset. In addition, inherited assets are treated as if held long-term by the beneficiary, even if the assets would have received short-term treatment in the hands of the decedent.
For assets inherited from decedents who died during 2010, the beneficiaries’ basis will depend on whether the estate was subject to the estate tax or elected out of the tax and chose instead for the beneficiaries’ basis to be determined under the modified carryover basis regime. Estates with assets valued at $5 million or less generally elected to be subject to the estate tax system since an estate could have had up to $5 million of assets and still paid no tax, and the beneficiaries would have received a basis equal to the properties’ fair market value at date of death. Regardless of which method the executor selected – estate tax with stepped up/down basis for the assets or the modified carryover basis—a beneficiary should have received information from the executor as to the basis of assets that he or she inherited.