Wednesday, April 03, 2013

Basis Step Up for Inherited Assets

When property is inherited, the cost basis is stepped up or down to the fair market value (FMV) at the date of death.   So when property is inherited from a parent, grandparent, sibling or third party, the new cost basis is the FMV on the date of death.   Step up or down for basis is done for all inherited property, including joint property with right of survivorship that is transferred to the surviving spouse, which I didn't realize until doing some research a couple weeks ago.

For most cases, the entire asset cost basis is changed to the FMV at date of death.   That is easily done for assets such as stock, bonds, and other liquid financial items.   Estimating the FMV of real property or collectibles can be more challenging, and may require a formal appraisal.    An approach can be to sell the property shortly after the date of death and assign the sale price as the FMV.

For joint property, usually only the part of the asset owned by the decedent is stepped up or down.   For example, if a husband and wife jointly own a house, only half of the house is stepped up or down when one spouse dies and transfers half to the other spouse.   However, in community property states, 100% of the asset is stepped up or down to FMV for the surviving spouse.

From what I've seen, there is a good  general understanding of stepping up assets received from other than joint property.  However, the step up or down rules for joint property may not be knowledge that is known to many people,

For more on The Practice of Personal Finance, check back every Wednesday  for a new segment.

This is not financial or tax advice. Please consult a professional advisor.

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