Until Congress, let the estate tax law expire in 2010, there was a concept of law known as the “step up in basis”. This basically meant that when you inherited property you received it at the fair market value at that time. In 2010, since there was no estate tax, the inherited property passed at the original purchase price (“basis”). The 2010 Tax Relief Act returned this law to inherited property being passed at the fair market value. It is critical to remember that gifts pass at original cost basis.
….if one of your parents had purchased a piece of land a long time ago for $1,000 that is now worth $500k. If they gift the property to you, your basis will be $1,000. If you sell the property for $500k you will trigger capital gains tax on $499k for both federal and state tax purposes. If however, the property was passed to you after the parent passed away, you would receive the property with a basis of $500k. If you then sold the property for $500k, no capital gains tax would be due.
This is critical distinction between a gift and inheritance, so careful planning is needed to insure that you don’t accidentally trigger a taxable event. Please let us know if you have any questions or before you make a transfer of assets.