Tax Benefit of Receiving Property Under a Will—Stepped Up Basis

Under tax code section 1012, the general rule for determining a taxpayer’s basis in property is the cost of such property. Determination of basis is critical to calculate the amount of a gain or loss earned or sustained in a disposition of property.

Determination of basis can depend on how the property in which a taxpayer has basis is received.  For instance, if a taxpayer receives property as a gift, the taxpayer’s basis in that property is called “carry-over” basis, so the basis is the same for the taxpayer as it was for the donor of the gift. See Tax Code Section 1015. If a taxpayer receives property from a decedent, the taxpayer has what is called “stepped up” basis, or in other words the basis held by the taxpayer is equal to the fair market value of the property at the time of the decedent’s death. Tax Code Section 1014.

For example, say A buys a house for 100K, which appreciates in value to 150K at the time A passes away. If A gifted the house to B one year before A dies, B’s basis in the house equals A’s basis at the time the gift is given, so 100K. If B sells the house for 175K, B will have realized a gain of 75K.

Alternatively, given the facts above, if B receives the house by devise from A, B’s basis in the house would be 150K (stepped up from A’s 100K basis). So if B eventually sells the house for 175K, she would realize a gain of only 25K resulting in a lower tax liability.


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