John R. Bullis: Making sense of the ‘step up’

A special tax benefit to save future income taxes is the “Step Up in Tax Basis.”

This happens when someone dies and leaves stocks, bonds, personal property and real estate to the heirs.

For example, suppose Joe bought a stock for $1,000 years ago and still has it when he dies. If the fair-market value of that stock at death is $11,000, the tax basis in the hands of the heirs is $11,000.

Then if the heirs sell the stock, they can receive $11,000 tax-free. The tax basis of that stock is increased from Joe’s cost of $1,000 to the value at death of $11,000. If the heirs sold the stock for $11,500, they would only have a $500 long-term capital gain. (All items inherited are given long-term capital gain holding period, even if they sold the stock just a month after inheriting it.)

If the heirs sold the inherited stock above for $10,500, they would have a $500 long-term capital loss. They would have the cash and a small tax deduction.

It is even better for community property owned by a married couple.

What if Joe and Mary own stocks, bonds, personal property or real estate, Joe dies and Mary inherits his half the community property? The original cost is disregarded and the new tax basis is the value at Joe’s death.

For example, if they purchased an item and the cost was $1,000 and the fair-market value at Joe’s death was $11,000, the new tax basis for Mary is $11,000.

The potential gain of $10,000 is not taxed. If the item is rental real estate, Mary gets a new depreciation tax basis. That will give additional tax deductions for her.

It is not unusual for a married couple to own real estate as Joint Tenants with Right of Survivorship (JTWROS) but it is really community property (purchased while married for example). Listing out all the facts can give the tax benefits of community property if that is the true substance of the ownership. Many trusts and/or wills will make a statement something like “all of our property is community property,” and that will help document the items get the step up in tax basis. IRAs do not get the step up.

Since the basic statute of limitations is three years after filing, if you are entitled to tax benefits of a step up in tax basis, amended returns can be filed for refunds.

Maybe it is time to check the title holdings, your wills and/or trusts, to see if what is really community property is clearly labeled and titled that way?

Did you hear? “Adventure is the result of poor planning” — Blatchford Snell

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.