The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Where's my Step Up
Mar 23, 2010
We have gotten a response from one of our readers asking the following:
"Our mother has transferred the farm to her two sons and there is a clause stating they will get a step up in basis when she passes away. They are wondering if she dies in 2010, will this property get a step up in basis?"
There are not enough facts in the question to make a complete answer, but I will outline what the rules are for 2010 as they stand now.
Under the old law, any assets passing to a heir received a step up or down in value to what it was worth at the time of death (or in some cases 6 months after death).
For 2010, this rule has been eliminated. This means any property passing to an heir will have a basis equal to the lessor of:
- Their current basis (in most cases this is the cost) of the property, or
- Fair market value
The estate can make an election to write up any property to fair market value not to exceed $1.3 million to be allocated to any asset (or $4.3 million if the assets are going to a surviving spouse). The estate will also have to file a report with the IRS and the heirs letting them know what the basis of all assets are.
So, in our readers case, if Mom bought the land for $200,000 50 years ago and it is now worth $5,000,000, there is:
- No estate tax owed;
- The estate can step up the cost basis to $1.5 million;
- And the remainder of $3.5 million will be subject to capital gains tax when sold, which may be upwards of $800,000 assuming current federal and state income taxes.
Also, many states will assess an estate or inheritance tax if the estate exceeds a certain amount.
This means that income tax planning for 2010 estates is very complex and we are waiting to see if Congress will fix this. We will keep you posted.