What the Heck is an Income Tax Basis?
Categories: Estate Planning, Living Trusts
Good question! It’s pretty straight-forward, and since it can really make a difference, let me spell it out. Hint – this has nothing to do with property taxes.
We are coming up on a time of year where our attention turns to all things tax and money related, so it seemed an appropriate time to run this article and address the whole “Tax Basis” topic!
It all starts with a “Capital Gain” which is computed by subtracting the amount that was originally paid for an appreciated asset from its final selling price. The difference is called a capital gain. So how does this pertain to the valuation of a person’s estate? It goes like this…
Valuation of the estate assets on the death of the owner resets the income tax basis to the value as of the date of death. Say what? Well, this simply means that the capital gain on sale by the recipient is reduced and may even be zero. Allow me to illustrate.
An Example of Income Tax Basis
Let’s say Dad bought a house in 1950 for $50,000. If Dad sells the house for $650,000 his capital gain is $300,000 ($650,000 minus $50,000 minus his personal residence exemption of $250,000 equals $300,000). The combined income tax for federal and state is about 30%. The tax on the sale would be about $90,000.
If instead his Son and Daughter inherit the house, valued at $650,000 when Dad dies in 2011, they get a NEW income tax basis of $650,000. They sell it a year later for $725,000 If one or both were living in the house, then they get a personal exemption of $250,000 which wipes out the gain ($725,000 – $650,000 -$250,000 = 0). If neither were living in the house, then the capital gain would be $75,000 ($725,000 minus $650,000 equals $75,000) and the income tax for federal and state would be about $22,500 ($75,000 x .3).
Does this Mean Parents Should Not Sell their Home?
Honestly each situation is different and there are several moving parts to consider. It is best that you consult with an attorney with a specialization in trusts and estates who can advise you on the best plan of action for your specific circumstances. When you talk with someone who is experienced and has worked first-hand with hundreds, even thousands of clients, you will benefit from prudent advice that could preserve your family’s wealth for generations to come!
You are welcome to print this Free 30 Minute Legal Consultation and use it to get some of your initial questions answered at no charge!
Diane M. Brown, Esq.
Working every day to keep my clients out of court!
It’s your money… Let’s keep it that way!
This blog contains general information and is not meant to apply to a specific situation. Please seek advice of counsel before proceeding as each case is unique.
Photo Credit: Diane Brown’s photo by Lisa Whalen and a special thank you to Corbis via the Microsoft Image Library for the use of additional images found in this blog post.
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