One of the major considerations involved in estate planning is the tax implications of any gifts made either during your lifetime or after your death. Not only should you take into consideration your own tax liability as well as that of your estate after your death, but you may also wish to consider the tax liability incurred by your beneficiaries as a result of gifts you make to them. As a general rule, a beneficiary is not directly taxed on a gift made to him or her; however, capital gains taxes may apply to gifts you make if the beneficiary sells the asset down the road. Fortunately, a step up in basis may be used to value real property you gift to a family member or loved one, effectively allowing you to pass down an asset without paying taxes on the asset’s appreciation in value.
Capital gains taxes are typically levied on the gain realized upon the sale of a capital asset. To illustrate, assume that you purchased your home 20 years ago for $150, 000. Today, the home is worth $500,000. If you sell the home tomorrow, you will owe capital gains taxes on the gain of $350,000 which represents the difference between the “basis”, or the original purchase price, and the sale price. Although there are a number of ways in which you might be able to defer or avoid paying capital gains taxes, the general rule is that any gain realized when you sell a capital asset is taxed. At a 15 percent tax rate, you would owe $52,500 in capital gains taxes on the sale of your home. Using a step in basis allows you to avoid this tax burden.
A stepped up basis allows you to use the current fair market value of a gifted asset instead of the benefactor’s basis. By way of illustration, assume that your great-aunt Mildred purchased her home way back in 1935 for $10,000 and has lived there ever since. The home is now worth $700,000. If aunt Mildred gifts you her home before she dies and you then sell the home, you will be responsible for capital gains taxes on $690,000, amounting to a tax bill on the sale of over $100,000. If, however, aunt Mildred leaves you the home in her Last Will and Testament you may be able to use a step up in basis, meaning your basis now becomes $700,000. Therefore, if you sell the home tomorrow you owe nothing in capital gains taxes.
If you have additional questions about whether or not a step up in basis can be used, consult with an experienced Missouri estate planning attorney.