We all know that the estate tax has been repealed for the year 2010 – and that it’s scheduled to come back, in some form, starting on January 1, 2010. But did you know that, along with the estate tax repeal came a change in the income tax rules that apply to inherited property? The change applies for this year only, and here’s how it works:
When you inherit property, the IRS assigns a value to the property, called the “basis”. If you sell the property in the future, the amount of your gain is measured from this basis, and that’s how your capital gains tax is figured.
Normally, inherited property gets a “stepped-up” basis, meaning that when you inherit property, the basis that’s assigned is the value of the property on the date of the death of the person you inherited it from. This year, though, inherited property gets a “carryover” basis. This means that the basis is not the value of the property as of the deceased person’s death, but his or her original purchase price for the property.
So, imagine you inherited your grandmother’s ring that was bought in 1950 for $700. When she died this year, the ring appraised for $12,000. If you sold the ring today, you might owe capital gains tax on the difference between the $12,000 present value of the ring and the $700 carryover basis. That’s $11,300 in taxable gain! (This is assuming that the executor of her estate didn’t assign you a portion of the additional $1.3 million in stepped up basis available to all estates. But that’s a subject for another day.)
Compare this with what would have happened if your grandmother had passed away in 2009, when the rule was that a stepped-up basis was applied to inherited property. Say the ring was worth $12,000 last year, too. Your basis would be $12,000, so if you sold it for its full value, your gain would be zero, and you wouldn’t owe any capital gains tax.
Amazing what a difference a change in the rules makes.
Stephen A. Mendel, Estate Planning Attorney
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