The transfer of any asset from an estate to an heir can trigger tricky tax issues. Sometimes things can get even more difficult when it comes to a tricky tax like the capital gains tax. Accordingly, it is worth knowing the ground rules regarding "basis" and "capital gains taxation" ahead of time.
ElderLawAnswers.com recently considered this subject and the key rules of thumb in an article titled “Do You Pay Capital Gains Taxes on Property You Inherit?”
In the normal course of things post-mortem, the estate pays any state and federal estate taxes, then the heirs might even pay a state inheritance tax. Thereafter, if the heirs sell any inherited asset, then they may escape capital gains taxes if the asset is sold at or below its date of death value whether in Overland Park or elsewhere.
This is the magic of what is called the “stepped-up basis.”
Capital gains is always measured by the “basis,” or the original value of the asset in the hands of the person being taxed (that is how you measure appreciation, after all). This becomes tricky, however, if the asset in question was “gifted” to an heir while the owner is alive. When this occur, then the heir is stuck with the original “basis” of the one who gifted the asset.
For example, a home purchased in 1972 and “gifted” in 2013 most certainly will have substantial appreciation given real estate values over 40 years. If the home is later sold by the donee, then substantial capital gains taxes will be owed.
On the other hand, the same home inherited in 2013 by the same heir can be sold with some 40 years of appreciation "stepped-up" to current fair market value and sold with minimal, if any, capital gains taxes owed.
The capital gains tax is anything but simple. Accordingly, consider this a brief introduction to a complex subject. The simple point to take away is that the "timing" of any wealth transfer can have serious tax consequences.
Fortunately, capital gains taxes can be minimized, if not prevented.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.For more information about estate planning and to download free tools to help you organize your estate, visit my estate planning website.
Reference: ElderLawAnswers.Com (August 7, 2013) “Do You Pay Capital Gains Taxes on Property You Inherit?”