Written by attorney Henry Daniel Lively

Basis of Inherited Property in 2010

Prior to 2010 an heir to property recieved a "step-up in basis" for inherited property that they received. The "basis" of a piece of property starts with the purchase price of that property and is used to calculate taxable gain when property is sold. Taxable gain is equal to the sales price of the property, less the tax basis. A "step-up in basis" means that the basis of inherited property increases to the value of the property on the date of death, or the alternate valuation date 6 months later if elected.

For the year 2010, "step-up" was replaced by "carry-over basis" rules. Carry-over basis means the basis of inherited property remains the same as it was for the deceased owner; which potentially increases the amount of gain upon the sale of the property. However, there is some minor relief that has allowed for a basis adjustment on inherited property. When property is inherited, the heir can choose to take a "step-up" in basis for $1.3 million of the property. For any amount inherited over $1.3 million, the heir's basis will be the smaller of the deceased owner's basis or the date-of-death-market value. The basis of property passing to a surviving spouse can be increased by an additional $3 million.

Basis of property given to the decedent by someone other than his/her spouse within 3 years of death cannot be increased.

In 2011, step-up in basis resumes as it existed prior to this Act, because all provisions of this tax act sunset after December 31, 2010.

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