Most of you are aware than when a property is sold, the seller is taxed on the “capital gains” realized, which is the difference between the value of the property when it was first purchased and its value when it was sold. The tax rate on capital gains for the 2016 tax year is currently 15% for those with income from $37,651-$415,050 (single) or $75,301-$466,950 (married filing jointly). For those with income higher than these ranges, this tax rate is 20%, and for those with income lower than these ranges, the capital gains tax rate is 0%.
When a property owner dies and the property is inherited, a “stepped-up basis” is used when determining the capital gains tax liability for the heir(s). Simply put, the value of the property on the date of death of the deceased owner will be used to calculate any capital gains tax when the heir(s) to the property sell it later. This is referred to as a “stepped-up basis”, because you are increasing the tax basis of the property from the original purchase price to the appraised value at the time of death of the owner.
It’s important for you and your clients to know that in a situation such as this, the property must be appraised by a licensed appraiser qualified to conduct appraisals in that particular location. The appraisal will be needed to substantiate capital gains taxes paid for the tax year in which the house is eventually sold, so it is an important tax document to keep.
As always, please feel free to contact me if you have any questions on this or other legal issues.
Don Gonzalez, Esq.