Real Estate Step-Up In Basis At Death Of Spouse
Introduction
Real estate is one of the most valuable assets that people own. When someone passes away, their estate goes through a process called probate. During this process, the estate's assets are valued, and any debts and taxes owed by the estate are paid off. One thing that many people may not be aware of is the step-up in basis that occurs when a spouse passes away. This can have significant implications for real estate taxes and should be understood by anyone who is dealing with the estate of a recently deceased spouse.
What is a Step-Up in Basis?
A step-up in basis is a term used to describe the way that the tax basis of an asset is adjusted when it is inherited. In other words, if someone inherits an asset that has appreciated in value since it was originally purchased, the tax basis of that asset is "stepped up" to its value at the time of inheritance. This means that the person who inherits the asset will not owe capital gains tax on the appreciation that occurred during the original owner's lifetime.
How Does a Step-Up in Basis Impact Real Estate?
When a spouse passes away, any real estate that they owned becomes part of their estate. If the surviving spouse inherits the property, the tax basis of the property is stepped up to its value at the time of the spouse's death. This means that if the surviving spouse sells the property, they will only owe capital gains tax on any appreciation that occurs after the date of the spouse's death.
For example, let's say that a couple purchased a home for $100,000 many years ago. The home is now worth $500,000. If the husband passes away, and the wife inherits the home, the tax basis of the home is stepped up to $500,000. If the wife sells the home for $550,000, she will only owe capital gains tax on the $50,000 gain that occurred after her husband's death.
Exceptions to the Step-Up in Basis
There are a few exceptions to the step-up in basis rule. For example, if the surviving spouse sells the property within one year of the spouse's death, the tax basis is not stepped up. Additionally, if the property is held in a trust, the tax basis may not be stepped up. It's important to consult with a tax professional to understand the specific rules that apply to your situation.
Conclusion
The step-up in basis that occurs when a spouse passes away can have significant implications for real estate taxes. By understanding how this rule works, you can make informed decisions about how to manage any real estate that you inherit from your spouse. If you have questions about the tax implications of inheriting real estate, be sure to consult with a qualified tax professional.