DLA In The News

Stepped Up Cost Basis At Death Saves Taxes

(c) 2007 Newsday. Reprinted by Permission

Stepped Up Cost  Basis At DeathThe problem:  My parents jointly owned a $550,000, two-family home outright when my father died in December.  Mom wants to sell, but an accountant told her since she didn’t sell by Dec, 31, 2006, she will owe taxes on my father’s share of the proceeds.  True?

The expert: David J. DePinto, CPA and certified elder law attorney, DePinto Law Associates, Melville. 

The rules:  People who sell their primary residence can exclude $250,000 of the taxable gain ($500,000 if married filing jointly) from their taxes.  When one spouse dies, that person’s $250,000 exclusion will apply only if the house is sold before Dec. 31 of the year of death, since a joint tax return cannot be filed the following year.

The strategy:  Take advantage of another tax rule, called a “step-up in cost basis,” that applies at death.

How it works:  The “cost basis” is the amount one deducts from the sales price to determine how much tax is due on the sale.  Only the difference – the gain on the sale – is counted as taxable income.

Since they owned the home jointly, your father’s interest in the house now belongs to your mother.  His cost basis would be $275,000 – half the home’s value at his death in December 2006.  The cost basis for your mother’s portion would be one-half of what they originally paid for the home, plus one-half of any improvements made over the years. 

Your mother still can exclude up to $250,000 of her one-half share of the gain.  Your father’s gain will be eliminated by the step-up that occurred when he died, unless the home has appreciated since last December.  If the second-family portion of the home was a rental, your mother will have to pay tax on one-half of any depreciation she previously used as a tax write-off.

The results:  Using your father’s step-up in cost basis, and her $250,000 exclusion, your mother should owe little or no income tax on the sale if the home is sold before it appreciates substantially.

Tags: Cost Basis, Cost Basis Tax Reporting, Stepped Up Cost Basis