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No Stepped-Up Basis for Estate Inheritors of Those Dying in 2010

09th December 2009
By Shane Flait in Estate Planning
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Up until 2010, property owned by a decedent at the time of death of his death had its tax basis changed from what the decedent's basis was to its fair market value - whichever was higher. For the year 2010 - and only that year - the law has been changed to 'whatever is lower'.

This change will generally cost inheritors of decedents who die in 2010 more taxes down the line - especially for those inheriting houses. Here's why.

Over the long run, most equities tend to increase in value. The owner of an equity property has a tax basis in it that's usually the price he paid for it. As time goes on, with all things being equal, the fair market values of equities tend to increase - if only by the effects of inflation.

A prime example is a house. Typically a house owned by a decedent at his death has a tax basis to him that's considerably less than its fair market value at the time of his death. In that case, an inheritor of a house from a decedent dying in 2009 had the house's tax basis stepped-up to its fair market value.

That means if he sold the house right away, at its fair market value, he'd have no capital gain tax to be paid since the selling price equalled the it's tax basis (stepped up to the fair market value). The stepped up basis would always benefit him no matter when he sold, too.

But now, under the same situation but for the decedent dying in 2010, the inherited house received by the inheritor with the same tax basis as it had in the hands of the deceased. That's because, according to the 2010 law, the lesser (and not the greater) of the fair market value or the decedent's basis becomes the inheritors basis.

So if the inheritor sold it right away or sometime in the future, he'd have a capital gain tax to pay based on the extent to which the selling price's fair market value exceeds the decedent's considerably lower tax basis. This law change comes from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). It provided for the repeal the law which gave the 'whichever was greater' provision at death for the change in tax basis for those dying after 2009. But remember, EGTRRA also eliminated all estate taxation for 2010. It was hoped that in 2001, we wouldn't need the estate tax after 2009.

Fortunately, the 'whichever is less' provision should be in effect for estates of those dying during 2010 only. Presumably, legislators will get their act together during this year and arrange to bring back the usual 'stepped-up basis' (corresponding to 'whichever is greater') that estate property received.

Unfortunately their actions will most likely bring back the estate tax with it too.


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