If I Die can I take the Taxes with Me - Part 2

(Listen Here 5:05 min)

Part Two - The Death Question

Section 102 of the internal revenue code says that an heir (beneficiary who inherits property) that receives property as a “gift, bequest, devise, or inheritance” takes that property tax-free.  It states “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance”.

You can read Section 102 at: http://www2.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000102—-000-.html

Basis of an Heir

The question then becomes, what if your heir then sells the property that they received as an “inheritance” from you? What is the heir’s basis for calculating his or her gain?  Will the heir have any tax liability?

At present, Section 1014 of the internal revenue code allows your heirs to take your property with a “stepped up basis” [roughly Fair Market Value (FMV)] of the property at the time of your death) so they would not necessarily take over your low basis in the property.  However, the tax code in this area may change, so you need to talk about this with your CPA or your accountant.  Under current Section 1014(a) the general rule applied to property an heir receives from a decedent is that the heir's basis equals the fair market value of the property at the time the decedent dies.  Because of Section 1014, any appreciation of the affected property that occurred during the decedent's lifetime may never be taxed. The current operation of this code section provides an incentive for taxpayers to defer taxes throughout one’s lifetime until death.  One strategy that people refer to with 1031 exchanges is called “Defer, Defer, Defer,…Die”.  The idea is that one never recognizes any gains during one’s lifetime, but instead continually defers the recognition of gain (compounding and building wealth tax-free) until they die.

Section 1014(f) says that this section shall not apply to decedents who die after December 31, 2009.  This “sunset provision” came from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).  According to EGTRRA, Section 1014 will be terminated. EGTRRA replaces Section 1014 with a modified “carryover basis” rule, under which the property will receive a basis equal to the lesser of the adjusted basis of the property in the hands of the decedent, or the fair market value of the property on the date of the decedent's death. So, your heirs would probably take over your low basis, and they would need to continue to defer the taxes by utilizing 1031 tax exchanges. The good news is that they could also continue the strategy of “Deferring, Deferring,  Deferring,…Dying”… generation after generation.

You can read Section 1014 at http://www2.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001014—-000-.html

About the Author:

Jeff Peterson (AKA: "Professor 1031") is a Qualified Intermediary and Serves as an Adjunct-Professor for the William Mitchell College of Law (Where He Teaches About Federal Income Tax). Jeff Works With People From All Over the USA to Save Money on Federal Capital Gains Taxes.

Bookmark, Share, and Receive Updates...

Bookmark this post, or send it to a friend by clicking the "Share This" icon below. You may also post this article to your website, blog or web 2.0 property - as long as you leave the content, links and the "About the Author" intact. Get notified of new posts by RSS or email, below.