I cited in a previous article a long-standing rule in the tax code that authorizes an exceptionally beneficial advantage for people who sell inherited assets that have increased in value, such as stocks, real estate and works of art. This column discusses some tricky rules.
Inherited assets generally are stepped-up in basis from their original cost to their value on the date of the previous owner’s death. For heirs, that means forgiveness of capital gains taxes on pre-inheritance appreciation and, on subsequent sales, tax liability based only on post-inheritance appreciation.
Eye the Calendar
Buried in the federal tax code is a provision that forbids a step-up in basis for a transfer of appreciated property from a donor to a donee when the donee dies within a year and the property returns directly or indirectly to the donor or the donor's spouse. As a result, the basis remains whatever it was at the time the donor transferred the asset to the donee.
The prohibition is spelled out in Code Section 1014 (e), one small passage in the voluminous code. It contains the words that eighty-six a tax break for a donor who transfers property to a severely ailing donee on whose death the property then reverts back to the donor.
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.