tax basis of an asset is typically its purchase price, plus any capital improvements made to it over time, minus any depreciation claimed (for certain assets like rental properties). 2. Inherited Property: When you inherit property from a deceased individual, such as real estate or investments, the IRS provides a special provision. The basis of the inherited property is "stepped up" to its fair market value (FMV) as of the date of the decedent's death (or an alternate valuation date, if applicable). This means that the new basis for tax purposes is not the original purchase price but the value of the asset at the time of inheritance. 3. Capital Gains: When you sell the inherited property, your capital gains or losses are calculated based on the stepped-up basis rather than the original cost. This can result in a substantial reduction in capital gains taxes because the difference between the FMV at the time of inheritance and the selling price may be much smaller than the difference between the original purchase price and the selling price. 4. Example: Let's say you inherit a house from your grandmother, and its FMV at the time of her death is $500,000. If you later sell the house for $550,000, you would only be subject to capital gains tax on the $50,000 difference between the FMV at the time of inheritance and the selling price. However, if the original purchase price of the house was $300,000, you would have had a much higher capital gain of $250,000 if not for the stepped-up basis. In essence, the stepped-up tax basis minimizes the potential capital gains tax liability for heirs and allows them to enjoy a more favorable tax treatment when selling inherited assets. This provision helps preserve family wealth and can be a significant
15
Powered by FlippingBook