In my last post, I gave an update on the current estate tax law and how it my apply to farmers for 2010. In that post, I referred to the term "Step Up" and I am using this post just to explain what the term Step Up or Step Down means.
Up until this year, when a person died, the property that passed through to their heirs received a step up or down in cost basis to the fair market value at the time of death. When the heirs would sell the property, this is the amount they would use for their cost basis. For example, if a farmer owned land that he paid $100,000 for and it was worth $500,000 when he died, the heirs would be able to use the $500,000 when determining their capital gain when they eventually sold the land. Conversely, if the fair market value at death was $50,000, then that would be the value they would use.
For the last several decades, this has been rule for inheriting property and then selling it by the heirs. Starting this year, the IRS requires to Step Down any property, but use cost only on the other property that is worth more than what was paid for it originally. However, the executor can make an election to step up value of up to $1.3 million or an additional $3 million for a surviving spouse. In addition, the final income tax return for the person dying will be required to fill out a schedule showing the cost basis of all assets passed on to their heirs. This cost basis is what the heirs will have to use in computing their capital gains tax when they sell any of these inherited assets.
As you can see, although there might not be any federal estate tax, there will be extra capital gains taxes and a lot more work for the executor and their professional to do.