Southern California Estate Planning, Probate, Trust & Litigation Law Blog

Monday, January 25, 2016

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 because of inflation, particularly when real estate prices have increased.

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 significantly less taxes if that property is sold by the beneficiary than if the original owner were to sell it and devise the money to his beneficiaries. Most simple wills provide that all of a testator’s assets are placed into a residual estate to be divided equally among the heirs. This means that an executor must liquidate the assets of the estate and divide the proceeds among the heirs. However, because there is no transfer of title before the property is sold, the heirs are stuck with the grantor’s basis and they lose an opportunity for a sizeable tax break.

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. These actions can have their own tax related consequences, 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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