Step-Up In Basis At Death Of Spouse Real Estate
Introduction
When a spouse dies, the surviving spouse may inherit real estate property. The surviving spouse may then sell the property, which may result in capital gains taxes. However, there is a tax benefit called the "step-up in basis" that can be applied to real estate property inherited by the surviving spouse. This article will explain what step-up in basis means and how it can be applied to real estate property.
What is Step-Up in Basis?
Step-up in basis refers to the adjustment of the cost basis of an asset when it is inherited. Cost basis is the value of an asset when it was acquired. When an asset is inherited, its cost basis is "stepped up" to its fair market value at the time of inheritance. This means that the beneficiary's capital gains tax liability is based on the difference between the fair market value of the asset at the time of inheritance and the sale price of the asset.
How Does Step-Up in Basis Apply to Real Estate?
When real estate is inherited, the cost basis of the property is stepped up to its fair market value at the time of inheritance. This means that if the surviving spouse inherits real estate property from their deceased spouse, the cost basis of the property is adjusted to the fair market value at the time of the deceased spouse's death. If the surviving spouse sells the property, their capital gains tax liability will be based on the difference between the fair market value of the property at the time of inheritance and the sale price of the property.
Example of Step-Up in Basis Applied to Real Estate
Let's say that John and Mary bought a house for $200,000. When John died, the fair market value of the house was $300,000. Mary inherited the house after John's death. If Mary sells the house for $350,000, her capital gains tax liability will be based on the difference between the fair market value of the house at the time of inheritance ($300,000) and the sale price of the house ($350,000). Mary's capital gains tax liability would be $50,000.
Limitations of Step-Up in Basis
There are some limitations to step-up in basis. For example, step-up in basis only applies to assets that are included in the deceased person's estate. If an asset is transferred outside of the estate, such as through a living trust or a joint tenancy with right of survivorship, then step-up in basis does not apply. Additionally, step-up in basis only applies to appreciated assets. If an asset has decreased in value, then the cost basis of the asset is stepped down to its fair market value at the time of inheritance.
Conclusion
Step-up in basis can be a valuable tax benefit for surviving spouses who inherit real estate from their deceased spouse. By adjusting the cost basis of the property to its fair market value at the time of inheritance, the surviving spouse can reduce their capital gains tax liability if they decide to sell the property. However, there are some limitations to step-up in basis that should be considered. It is always a good idea to consult with a tax professional to understand the tax implications of inheriting real estate property.