What is the New Basis of a Decedent’s Assets Upon Death?
For tax purposes, the basis of an asset generally equals its purchase price, and an asset’s basis determines the gain or loss when sold. If, for example, you purchase stock for $50 that you later sell for $75, you have a $25 taxable gain (i.e., $75 sale price less your $50 basis). As a general rule, capital improvements made to an asset are added to its basis. To illustrate, if you purchase a house for $500,000 and add a $100,000 pool, the house’s basis will be $600,000.
An asset acquired from a decedent receives a new basis equal to its fair market value as of the decedent’s death. This basis is, thus, “stepped-up” where an asset’s fair market value exceeds the decedent’s basis, or “stepped-down” where basis exceeds fair market value. To illustrate this rule, if a decedent during his life purchased stock for $50 that was trading for $200 on the day of his death, the stock’s basis will be stepped-up to $200. Therefore, the $150 of unrealized gain is essentially wiped out as a result of the decedent’s death, permitting the decedent’s beneficiary to sell the stock and have no taxable gain. Conversely, if a decedent during his life purchased stock for $200 that was trading for $50 on the day of his death, the stock’s basis will be stepped-down to $50, and the $150 of unrealized loss is gone and cannot be deducted or otherwise utilized.
Assets held in a revocable trust and a qualified terminable interest property trust, as well as property over which the decedent possessed a general power of appointment, also receive a new basis adjustment on death of the settlor, spousal beneficiary, and powerholder, respectively.
As part of his tax plan, President Biden has proposed eliminating the basis step-up rule discussed above. It remains unclear, however, if this change will become law.
For more information on tax consequences as a result of a decedent’s death, please call Comiter, Singer, Baseman & Braun, LLP at (561) 626-2101 or toll free (800) 226-1484 to speak with one of the firm’s estate and tax planning attorneys.