2011 Tax Laws Affecting the Inheritance of Real Property

In 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (Tax Relief Act) of 2010 extended the sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) for two years through 2012.  For those who may be inheriting real property in 2011, it is important to note that the “step up in basis” rules will remain through 2012.

In order to adequately explain what this concept entails, here is an example from the Wall Street Journal:

Suppose your Uncle Joe died earlier this year and left you some valuable stocks, bonds and other items. Those assets have risen in value over the years. You’re thinking of selling them to buy a new home or to invest in something else.  How would you figure out your tax cost for capital-gains tax purposes?

Typically, your tax cost is the fair market value of the assets on the date your uncle died — or, in certain cases, their value six months later. That means you don’t have to worry about figuring out what Uncle Joe originally paid for them. You don’t have to rummage through his old records or search the Web.

All that should matter is their fair market value on the date he died (or, in certain cases, six months later). This is known as “step up in basis” because your tax basis on those appreciated assets typically gets stepped up to the date-of-death value.

The General Basis Increase (the sum of the aggregate basis increases) is the maximum allotted amount the Tax Code will allow to be “stepped up.”  The EGTRRA of 2001 preserved the step up in basis for up to $1.3 million dollars (plus an additional $3 million for assets given to a spouse) through 2010.  Then the Tax Relief Act of 2010 extended the EGTRRA to 2012.  Thus, the General Basis Increase for 2011 will remain at $1.3 million, and if assets are given to a spouse, up to $4.3 million.  Therefore, if the value of assets inherited totals more than $1.3 million, assets beyond that sum will not be “stepped up.”

While creating an estate plan, it is always important to consider tax consequences on the estate, any named beneficiaries, and the planner himself.  Any named beneficiaries who have an interest in real property should also be aware of the taxes they will be responsible for after inheriting real property.  The Tax Code is intimidating and daunting; however, the Estate Planning Attorneys at Lonich Patton Ehrlich Policastri can help clarify the process.  If you are interested in learning more about taxes on your estate plan or how you may be affected by receiving an inheritance, please contact the experienced estate planning attorneys at Lonich Patton Ehrlich Policastri for further information.  Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results.  While this post may include legal issues, it is not legal advice.  Use of this site does not create an attorney-client relationship.