As an estate planning and probate attorney, I am often involved in the sale of real estate that my clients inherited and have to deal with a very important question: “will my client have to pay capital gains tax on the sale”? As a brief introduction, capital gains tax is the government’s way of taxing people when they sell property for more than they bought it. Special basis rules with respect to the basis of certain other property acquired from a decedent are set forth in paragraph (c) of 1.1014-2. In the case of stock in a DISC or former DISC, the provisions of this section and 1.1014-2 through 1.1014-8 are applicable, except as provided in 1.1014-9.
In our second scenario, Jimmy would have a taxable gain of only $50,000 when he sells the property.A more common example, and one I deal with frequently, is where mom dies owning a $1.2 million home which she bought in 1972 for $10,000 (remember when homes in NYC cost that little? Me neither). But what if, instead of selling the investment property, John dies in January 2015, his son Jimmy inherits the property and sells it for $400,000 in 2017 – what is Jimmy’s taxable gain? Is it $300,000 (the difference between what Jon paid and the sales price in 2017) or $50,000 (the difference between the date of death fair market value and the sales price)? In my experience, many people tend to think the answer is $300,000 but the good news for beneficiaries is that inherited property (whether through a will, intestacy, or through many types of trusts) gets a step-up in basis when the decedent dies. As of December 2010, the anticipated sunset was therefore removed.' As a layperson, I may have understood 98 of the article before this.IRC Section 1014(f) is a new paragraph of the Section that requires beneficiaries to use a Date of Death (DOD) valuation for cost basis purposes that is no larger For example, if John bought an investment property for $100,000 in 2010 and sells it for $350,000 in January 2015 (the fair market value at the time), will have to pay capital gains tax on the $250,000 gain. 111312, IRC § 1014(f) provided that this section would not apply to decedents dying after December 31, 2009.
As an example, if dad died and left a $250,000 property to son who then sold it a year later for $270,000, the son would have a $20,000 capital gain. And since the tax basis is the starting point for determining capital gains tax, it stands to reason that most real estate sales that occur shortly after death will not incur a capital gains tax. In addition, expenses related to the sale of the real estate such as transfer taxes, broker’s commissions, and legal fees further increase the tax basis. What would mom pay if she sold the house while she were alive? Over $420,000!The reason for this result is that the tax code (IRC 1014) states that the tax basis of a property passing to a beneficiary is the fair market value at the date of the decedents death (with some exceptions). How much capital gains tax would he owe? Likely very little to none.
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