When beneficiaries inherit assets, those assets generally receive what's called a "step up"in basis. Understand how this saves beneficiaries taxes on appreciated assets.
Capital gains taxes are taxes that you need to pay when you sell an asset that has gone up in value. You are taxed on the difference between what you bought the asset for (called "basis") and what you sold it for. Every piece of property has a tax basis. Generally, it's the amount a person paid for the property. When you inherit an asset, you need to know what basis that asset has, so that, later, if you go ahead and sell it, you can calculate the capital gains taxes that will be due. (Currently, the federal long-term capital gains rate is 15% for most people; 20% + a 3.8% (23.8%) Medicaid surcharge for high earners.)
Generally, an asset is inherited with a basis equal to its date of death value. This is called a stepped-up basis, because an asset's basis is increased to reflect its value at the date of death. A step-up in basis is a big tax advantage, because it reduces the capital gains taxes due upon sale of an inherited asset. The higher the tax basis, the lower capital gains upon the sale of that property.
For example, Ted purchased a Maine house in 1980 for $100,000 and died in 2021. He left his house to his daughter, Suzie. To determine the basis that Suzie now has in the house, she needs to have the house appraised by a certified real estate appraiser to determine the value (not, for example, her Aunt Mildred who dabbles in real estate.) The appraiser determines that the house is worth $400,000 as of Ted's date of death. Suzie should keep a copy of this appraisal report.
When Suzie sells the house the following year for $450,000, she will be taxed on only that $50,000 gain, not on the difference between $100,000 (what her father paid for the house in 1980) and $450,000 (what she sold it for in 2015).
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