Tax Tip of the Week
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For the week of
June 12, 2000
Property passing through an estate may get a huge tax break
When you sell an asset, the taxable gain is determined by
comparing the selling price with your "tax basis." Your basis is usually what you paid for the property,
less any depreciation taken. But what if you inherited the property from an estate?
Generally, your basis in property that passes to you from an estate is the fair market value of the asset as of
the decedent's date of death. If the decedent's basis in an asset was $100,000 and the asset's fair market value
at the date of death was $500,000, you would get this "step-up" in basis. If you then sell the asset
for $500,000, you would have no taxable gain to report on your income tax return.
In the above example, what would happen if the deceased person had sold the property and had an installment contract
for $500,000 due to him at the date of his death? There is no step-up in basis for such items. They are referred
to as "income in respect of a decedent" (IRD). To add insult to injury, the one who inherits the contract
must pay income tax on the $400,000 of gain. There is some tax relief, however. The one reporting the gain on his
or her tax return is entitled to a deduction for the estate tax paid on the value of the contract in the estate.
If you inherited property from an estate that paid federal estate tax, review the documents to determine if you
can claim a deduction. The dollars involved can be substantial.
If you would like our assistance, please contact
us. We are here to help you understand the ever-changing tax laws.
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