TAX130 - GUIDE: Determining the Basis of Inherited Property

Determining the Basis of Inherited Property

Presented by Tim Weller

The basis of property inherited upon death is traditionally known as the fair market value (FMV) on the date of the owner’s death. You may also hear the term “stepped-up basis.” Often, an asset may have increased in value since the decedent purchased it, and the beneficiary can benefit from a tax-free increase (i.e., step-up) in value.

Although there are exceptions—and you should always seek help from your tax advisor—the following fundamental principles offer a good starting point for determining the basis of inherited property.

General Rule

The basis of the inherited stock is the FMV on the decedent’s date of death or on an alternate valuation date (e.g., six months from the date of death) if chosen by the decedent’s executor. A beneficiary’s basis may be stepped up or down, depending on whether the stock appreciated or depreciated in the decedent’s hands. If the beneficiary later sells the stock, any gain will be treated as a long-term capital gain, regardless of how long the beneficiary actually held the stock prior to sale.

This rule does not apply to property inherited from a decedent if you or your spouse gave that property to the decedent within one year before his or her death. In such cases, the basis of the property is the decedent’s adjusted basis immediately before death, rather than the FMV.

Surviving Spousal Joint Tenant

Where the property is held by a husband and wife with rights of survivorship, one-half of the property is treated as belonging to the first spouse to die, without regard to either spouse’s contribution to the purchase price. Thus, the surviving spouse would receive a new basis in the deceased spouse’s 50 percent interest, while the basis of the surviving spouse’s 50 percent interest would remain the same.

Surviving Nonspousal Joint Tenant

The general rule is the entire value of the account is included in the deceased’s estate, and the surviving joint tenant receives a new basis on the total value of property. If the joint owner can prove each party’s personal contribution to the purchase price, however, only a prorated share will be included in the deceased’s estate. The basis of the property will be adjusted accordingly. For instance, if the deceased joint tenant contributed 60 percent of the purchase price, only that 60 percent interest would receive a new basis when transferred to the joint tenant. The joint tenant’s remaining 40 percent would retain the original basis of the purchased property.

Community Property

If one-half of the value of property owned by a couple is includable, for federal estate tax purposes, in the gross estate of the first spouse to die, then both the decedent’s and the surviving spouse’s one-half interest in the community property would receive a new basis equal to the property’s FMV on the decedent’s date of death (or on an alternate valuation date).

The one exception to this rule involves separate property that has been converted to community property. If the conversion occurred less than one year before the death of the first spouse, and that spouse didn’t originally own the property, then there would be no step-up in basis of the decedent’s one-half interest if it passed back to the surviving spouse. The surviving spouse, however, would receive a step-up in basis of his or her one-half interest, as that interest was not received by gift from the deceased spouse.

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and (for some purposes) Wisconsin are community property states.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Tim Weller is a financial professional with Weller Group LLC at 6206 Slocum Road, Ontario, NY 14519. He offers securities as a Registered Representative of Commonwealth Financial Network®, Member FINRA/SIPC. He can be reached at 315-524-8000 or at tim@wellergroupllc.com.