Determining Basis of Inherited Property

Inherited Property Basis

• When you receive inherited property your basis in that property is equal to the fair market value of the property on the date of death of the one who is leaving the property to you.
• The only exception to this rule would be if an estate tax return is filed and the alternate valuation date is used. In this case your basis would be equal to the fair market value of the property six months after their date of death.
• Jointly owned property, with spouse for example, would get a half step-up in basis (see example #2).

 

 

Example 1:

You inherit 500 shares of XYZ Company when your grandfather passes away on April 30, 2015. The fair market value of those shares was $50,000 on April 30th (date of death). $50,000 would then become your basis in those shares. It does not matter that your grandfather only paid $10,000 for the shares back in 1998. Now let’s assume you sell all 500 shares on May 30, 2015 for $55,000. You would recognize a long-term gain of $5,000.

This highlights the importance of good estate planning. Had your grandfather sold the shares himself prior to his death he would have had to pay taxes on all of the gain above his original $10,000 purchase price of the stock. That is quite a big difference to pay tax on.

 

Example 2:

You and your spouse purchased a piece of land held for investment in 2002 for $30,000. Your spouse passes away in 2014 when the fair market value of the land equals $100,000. Your basis would then be stepped-up to $65,000 (Your original half of purchase $15,000 + half of the fair market value at spouses death $50,000).

 

These are just some of the basic situations we see often concerning inherited property. Things can get much more complicated concerning your particular situation. If you have any questions about this or any other accounting related topic, please do not hesitate to contact us here at Shein & Wente CPA in Melbourne, Florida!