Basis of an inherited capital asset is generally going to be the fair market value of the property on the date of death or alternative valuation date, if elected by the personal representative. With the exception of 2010 transfers electing modified carryover basis, a gain on inherited property is always long term.
Step Up Basis
A step up in basis occurs when the fair market value is greater than the decedent’s basis. It is important however to understand that the form of ownership will affect the amount of the step up in basis in regard to the inherited property. Forms of ownership that can affect the step up in basis include:
1. Qualified Joint Interest – A qualified joint interest is any interest in property held by a husband and wife as tenants by the entirety or tenants with rights of survivorship. One half of the value of the property receives a step in basis to the fair market value.
2. Joint tenancy with rights of survivorship – Joint tenants with rights of survivorship share an equal interest in property. This means that they participate equally in income and deductions. If one owner dies, only the portion included in the decedent’s estate receives a step up in basis. The amount is dependent upon the percentage of total consideration for the property the decedent provided and whether or not a decedent made a gift. Where the capital contribution was 75%, and the decedent did not gift any portion of the property, 75% of the property receives a step up in basis.
3. Community Property – In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), the husband and wife each usually own half of the community property. When either spouse dies, the total value of all community property, even the part belonging to the surviving spouse, can receive a step up in basis, provided the decedent’s share is part of their gross estate.
When it comes to receiving a step up in basis in regard to inherited property, it is important to understand the law and its complexities. If you are unsure if your specific situation qualifies for a step up in basis, it may be best to seek the help of a trained tax professional.