by Phoenix attorney Christopher A. Combs, partner with Combs Law Group, P.C.
In a recent column you stated that there would be no tax owed when a brother and sister inherited their mother’s ranch in northern Arizona. The reason you gave was that there was a ” step-up” in basis of the ranch to the value of the ranch at the time of the mother’s death. Does the increase in the value of the ranch just disappear upon the death of the mother? If you are correct, the thing for me to do is convert all of my stocks and bonds and other investments to real estate so that any increase will not be taxed upon my death.
The increase in value of the ranch does not just magically disappear. The Internal Revenue Code simply provides that there is no tax owed on this increase in value when the asset is sold. For example, if the mother bought the ranch forty years ago for $10,000 and the ranch is worth $1,000,000 at the time of the mother’s death, there will be a ” step-up” in basis of the ranch from $10,000 to $1,000,000. The result is that, if the brother and sister sell the ranch for $1,000,000, there will be no capital gains tax owed, or if they sell the ranch for $1,200,000, there will be a capital gains tax owed only on $200,000. This ” step-up” in basis for inherited property is probably the greatest tax break in the Internal Revenue Code, and is available not only for real estate but for other assets such as stocks and bonds. Note: The mother’s estate may be liable for estate taxes at the time of her death on the value of her ranch and other assets.
The above is for informational purposes only and is not intended as definitive legal or tax advice. You should not act upon this information without seeking independent legal counsel. If you desire legal, tax or other professional advice, please contact your attorney, tax advisor or other professional consultant. Reprinted with permission. Copyright 2006, all rights reserved.