Capital Gains Tax – Death Tax –Step Up in Basis

March 3, 2015 by

Death taxes are a thing of the past or just apply to the ultra-rich – right? Many believe paying estate tax or death tax, as it is often called, does not apply to them. Some have heard Florida has no estate tax. Some think that when they pass away, their heirs will not be affected by the estate tax because of the high exemption allowed by the federal tax laws. They erroneously conclude their heirs will not be affected by any tax when the parents pass away.

The reaction is often one of disbelief when someone learns a tax will be imposed on their heirs after the deaths of the parents because of their particular circumstances. In some situations, the heirs will be hit with a capital gains tax on the sale of the homestead owned by the parents. The capital gains tax is not an estate tax. This tax is not imposed because of a person’s death. It applies to the heirs or anyone who makes a profit that is taxable according to the tax laws.

One way a capital gains tax applies when parents pass away is called the step-up in basis. It applies to property the heirs receive from their parents when they pass on. The heir’s basis is equal to the fair market value (FMV) of the homestead when the last parent dies.

Here is an example. The parents own a homestead they originally purchased for $90,000. Through the years, they added improvements at a cost of $10,000, so their adjusted basis becomes $100,000. When the last parent eventually dies, the FMV of the homestead is $200,000. It matters little if the last surviving parent gives the home to the heirs through a will or trust; the basis in the home is still $200,000. When the heirs sell it for that amount, they achieve a capital gain that is not taxable.

Compare that situation with another scenario. The parents give the homestead to the heirs before their deaths, and the heirs take the adjusted basis of the parents, which is $100,000. The heirs are in the 25 percent income tax bracket. They sell the homestead for $200,000. The heirs have a gain of $100,000. They must pay the capital gains tax on that amount, which, at the 2015 rate, is 15 percent, or $15,000. In this situation, the parents avoided probate of the homestead, but the heirs had to pay $15,000.

With just a little planning, the parents could have lawfully avoided that $15,000 capital gains tax. Call us today (813) 852-6500 for a free 30-minute consultation if you want to know more about the capital gains tax, the death tax and how to avoid probate. Howard Stross will help you protect your assets while taking care of your loved ones.

This article is for general information only and is not intended to provide legal advice. If you need to probate a will, you can talk to a Florida probate attorney at our office. Also, if you would like to set up a living trust to avoid probate, you can talk to an estate planning attorney.