Cost Basis For Inheritance Set To Expire In 2010

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Summary: Currently, when you inherit property, the cost basis when you go to sell is the property's market value at time of the person's death. You pay capital gains tax on the difference between the market value and the selling price of the home. This stepped-up cost basis is set to expire in 2010, and so heirs would have to pay capital gains tax on the difference between the original amount paid for the home and the selling price. President Obama has promised to extend the estate tax law, including this provision for a stepped up cost basis beyond 2010. See other articles on cost basis and estate tax at ThinkGlink.com.

Several weeks ago, a reader read what seemed like conflicting advice in the same real estate section. In an answer to a reader, I wrote that it’s generally better to inherit property, because you get a “step-up” in the cost basis. In other words, you inherit the property at the current market value on the day of the owner’s death. So, if you turn around and sell it for the price that is the current market value, you wouldn’t owe any taxes on the property.

Another columnist wrote that the stepped-up basis tax law will expire in 2010, and that you would inherit property at the owner’s current basis. If you sold the property, you would then pay capital gains tax on the difference between the decedent’s cost basis and the current market value.

Confused? According to Chet Burgess, an enrolled agent who owns Brookwood Tax Service in Atlanta, “As the law currently stands, the basis step-up would expire with the estate tax, which is also set to expire in 2010. However, the President has already made it clear he will not allow the estate tax to expire, and is proposing to hold the estate tax exemption and tax rates at or close to their current amounts. If he succeeds in that effort, he generally is expected to maintain the basis step-up.”

President Obama has indicated that he would support freezing the current estate tax exemption at $3.5 million per person, or $7 million for a married couple. Next year, the estate tax exemption is scheduled to fall to zero, meaning you can inherit any amount estate tax-free. The exemption is currently expected to resume at $1 million in 2011.

Burgess said that since an extension of the current estate tax laws has not yet been brought up for a vote in either house, figuring out what will happen “would be pure speculation at this point.”

April 9, 2009

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Related Topics

• capital gains, 
• cost basis, 
• estate planning, 
• taxes

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