Where's my Step Up

Published on: 23:19PM 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.