Step Up in Basis Rule

December 12th, 2012 - Carmichael Clark

Everyone is interested in minimizing their taxes. This is especially true with Estate Planning, where inheritance can create a taxable event for your heirs. For tax purposes, Washington employs a Step-up-in-Basis Rule. This rule is important for minimizing the amount of capital gain taxes to your heirs. Here are the basics of the Rule.

‘Basis,’ generally, is the amount of capital costs one has in a given asset; i.e., the price you paid for it. For example: If you bought a house for $10,000, and haven’t contributed value since, then your basis in the property is $10,000. By contrast; if you added a $50,000 addition to the property, then your basis would be $60,000. ($10,000 + $50,000)

Basis becomes important when you, or your heirs, go to sell the asset. The Basis will affect the taxable gain to the seller. For example, if you sold the unimproved house for $150,000, then the taxable gain would be $140,000. ($150,000 – $10,000).

The Step-up-in-Basis Rule creates a different, more favorable, outcome. The Rule allows that at the time of devise under a Will or other Testamentary instrument, the Basis of the property is, by operation of law, changed to be the Fair Market Value of the asset at the time of death. (Or in some cases, 6 months after death) Therefore, the basis in your property becomes equivalent to the exact value of what you pass on to your heirs; avoiding for them capital gain on the asset. In our above example, the heirs would receive property worth $150,000, with a basis in that property of $150,000. Their taxable gain would be zero. ($150,000 – $150,000). Not bad.

In Washington, all property acquired during marriage, other than by gift or inheritance, is generally presumed to be community property that is owned in equal shares by a married couple. At the death of the first spouse, only the deceased spouse’s half-interest is included in that spouse’s gross estate; however, the entire value of the community property receives a step-up in basis, which is an important advantage for community property states.

-Evan Jones, Attorney

Disclaimer: This article and blog are intended to inform the reader of general legal principles applicable to the subject area. They are not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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