Basis Differences of Land Transfers to Heirs: Gifting vs. Transfer at Death
May 20, 2011
I am often presented with the question as to whether it is better to gift land (or other assets) during life, or transfer them at death, through their estate plan. The answer depends on the facts and circumstances of each individual situation. However, there are some distinct differences with each transfer that is the same for everyone. A major difference involves the basis of the land.
An asset's "basis" is the original value of an asset for tax purposes. In land transactions, this is usually the purchase price, plus any improvements. When you gift an asset in life, you are transferring your basis in the asset. This is known as "carry-over basis." Accordingly, the recipient’s basis in the asset you gifted them will be the same as your original basis. It is different when you transfer an asset at death. At death, the asset recipient will receive a "step-up" in basis. The basis of the asset in this case is determined by the fair market value of the asset at the date of death. The original owner’s basis in the asset is inapplicable. There are exceptions to these rules, and you should make sure you understand how the rules relate to your specific circumstances.
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Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.