Wellesley, Massachusetts
Law Office of Lawrence G. Hoyle
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Stepped-up Tax Basis

 

Stepped-up Tax Basis

Internal Revenue Code Section 1014 permits certain inherited property to receive a new tax basis equal to the fair market value of the property as of the date of death.  Thus, property that has appreciated in value during a decedent’s lifetime receives a “step up” in tax basis upon the decedent’s death if sufficient ownership or control is retained to result in the property being includible in the decedent’s estate for estate tax purposes. This means the recipient of the property gets a new tax basis equal to the fair market value of the property as of the date of the decedent’s death. Consequently, the growth in value of this property that occurs during the decedent’s lifetime avoids federal and Massachusetts capital gains taxes, and rental real property and other depreciable assets have a new tax basis for depreciation deductions. Certain assets, such as retirement accounts and annuities, do not qualify for a step up. If the fair market value of property has decreased from the time the decedent purchased the property to the time of death, then the tax basis will decrease to the date of death value - there will be a step down instead of a step up.

 

Carried-Over Tax Basis

Internal Revenue Code Section 1015 provides the property gifted during a person's lifetime does not receive a step up in tax basis at death.  Consequently, property that has appreciated in value during a decedent’s lifetime receives a “carry over” tax basis if sufficient ownership or control is not retained and the property is not includible in the decedent’s estate for estate tax purposes. This means the recipient of the property takes the same tax basis in the property as it had when owned by the decedent. Consequently, the growth in value of this property that occurs during the decedent’s lifetime is subject to federal and Massachusetts capital gains taxes when the property is sold, and rental real property and other depreciable property does not get a new tax basis for depreciation deductions. If the fair market value on the date of the gift is less than the decedent's tax basis, then the donee's tax basis will be the fair market value on the date of the gift instead of the decedent's tax basis - there would be no carry over.

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