The Dean Law Firm Blog

Tuesday, June 20, 2017

What is a tax basis and how will it affect my estate plan?

A tax basis is essentially the purchase price of a piece of property.  Whenever that property is sold, the seller must pay taxes on the difference between the sale price and the original purchase price.  This concept applies to all property, including stocks, bonds, vehicles, mechanical equipment, and real estate.  If debts are assumed along with the purchase price, the principal amount of the debt will be included in the basis.  The basis can be adjusted downwards when a person deducts depreciation costs on his or her income tax returns, and may be increased for capital investments towards improving the property that are not deducted for income tax purposes.  Selling a property that has been held for a long time can carry a serious tax burden, particularly when real estate prices have increased substantially.

When an individual receives property as an inheritance, the tax basis is reset to whatever the fair market value is at the time of the transfer of title.  This means that the heir would pay no capital gain taxes if that property is sold by the beneficiary upon receipt, but if the original owner were to sell it and give the money to his beneficiaries during his lifetime, there may be significant taxes due.  

A person planning his or her estate may also reset the basis in his or her property by giving it as a gift directly to his or her heirs or by gifting the property to an inter-vivos trust.  This is a method sometimes used to limit estate tax exposure, but must be used with caution as these actions can have other tax-related consequences, such as capital gains tax, or create other unintended problems for the beneficiaries.  Only an experienced estate planning attorney can advise you on the most efficient way to pass your assets on to your heirs.

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