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Estate Taxes

Determining the Tax Basis of a Decedent's Home


When you're helping a client with estate planning, it's important to ensure they understand when estate taxes and inheritance taxes apply and how each is calculated. This will help them make an informed decision about their options. 

Aug 9th 2021
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Most people's estates are too small to be charged estate tax. According to the IRS, in 2021, only estates worth over $11.7 million are liable for estate taxes. Many states don't have an estate tax or inheritance tax for homes or any other assets of a decedent, regardless of their value.

However, when estate or inheritance taxes do apply, the value of the home at the time of death is the core consideration as to whether the home’s value will be taxed by either estate tax or state inheritance taxes. The final tax rate may be based on how much the asset is worth and the inheritor’s relationship to the decedent. When calculating the value of the asset, appraisers use what is known as the cost basis.

Understanding Cost Basis and its Use in Tax Rate

A cost basis method for estate tax is different from when it's used for other tax purposes. Cost basis can represent, for example, the original value of an asset when it comes to the capital gains tax due on the sale of the asset. If a client inherits an asset, then the cost basis of that asset from the inheritor’s standpoint is its fair market value (FMV) either at the time of the deceased person's death or when the transfer of assets was made to the inheritor.

FMV is the price that an asset would sell for on the open market, all other things being equal. The cost basis for the estate tax assumes that both buyers and sellers know that the asset is up for sale. It also considers that a reasonable time would have elapsed for an offer to be made. That offer would reference the open market value for the property.

The appraiser will establish the cost basis of the property on the valuation date. If the value of the asset has dropped significantly since the previous owner's death or the date of transfer, the appraiser may opt to use a different date for the appraisal, as long as it falls within six months after the date of the original owner’s death. Delaying the appraisal might defer some of the tax due on the inheritance if the value of the asset drops. It’s important to note that under Internal Revenue Code 1014, the inheritor of an asset will get a step up in the basis of the asset when estate taxes are due and also when no estate taxes are due.

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