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Tax Basis on Inheriting Property

January 11th, 2016

Posted in Estate & Personal Planning,IRS & Tax Information,Real Estate Law

While the tax basis of a property is important in determining estate tax for higher net worth individuals, it is also a significant consideration for individuals of any net worth in determining the income tax (gain or loss) beneficiaries will ultimately pay when the property is transferred. The basis of property inherited from a decedent is generally the Fair Market Value (FMV) of the property at the date of the individual’s death. Thus, a real estate or personal property appraisal may be advisable to consider.

The FMV can also be determined in one of the following ways: the FMV on the alternate valuation date if the estate chooses to use alternate valuation; the value under the special use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes; 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; and lastly, 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. For more information of any of these, please see the Instructions for Form 706.

The above rule does not apply to appreciated property that you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent’s death. Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. Your basis in this property is the same as the decedent’s adjusted basis in the property immediately before his or her death, rather than its FMV. Community property states can also have different rules. It’s always best to consult with a qualified attorney for specific advice.

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