[ad_1]
:max_bytes(150000):strip_icc():format(jpeg)/182667184-56a636213df78cf7728bd987.jpg)
The cost basis of an inherited asset isn’t actually calculated; it’s determined by adjusting its value to its fair market value when it is transferred to heirs. The cost basis determination helps heirs calculate whether they owe taxes in states with an inheritance tax and calculate capital gains taxes (or losses) if they later sell the asset.
Key Takeaways
- The cost basis figure usually equals an asset’s fair market value when the estate owner dies or the asset is transferred.
- A “step-up” in basis means the cost basis is raised to the asset’s market value on the original owner’s date of death for tax purposes.
- As of 2025, twelve states plus the District of Columbia levy an estate tax, while five levy inheritance taxes.
Determining Cost Basis
Cost basis replaces the original value used for tax purposes when calculating capital gains on assets. It can be determined in two ways:
- Fair Market Value: The cost basis may equal the fair market value (FMV) of the property or asset at the time of the decedent’s death or when the actual transfer of assets was made. Fair market value is the price that a property or an asset would command in the marketplace, given that some buyers and sellers know about the asset and that a reasonable period is available for the transaction.
- Alternative Valuation Date: If the value of the assets has dropped since the date of death or their transfer, the estate administrator can decide to use an alternate valuation date for the estate. This extends the valuation to six months after the date of death. Under estate law, the estate’s value must have dropped within six months to choose this option.
Tip
A “step-up” in basis resets the cost basis of an appreciated inherited asset for tax purposes, where the cost basis is raised to the asset’s market value on the prior owner’s date of death, reducing future capital gains taxes. This provision applies to financial assets like stocks, bonds, mutual funds, and real estate.
Capital Gains Tax
Those who sell inherited assets may have a tax liability based on capital gains. No matter how long property or assets are held, either by the decedent or the inheriting party, an inherited property is considered to have a holding period greater than one year.
That means capital gains or losses are designated long-term capital gains or losses for tax purposes. Even if assets are sold immediately, beneficiaries avoid the less favorable treatment typically given to assets held for less than a year. They are taxed at the normal income tax rate.
Estate Tax by State
Estate taxes are calculated by totaling the value of the deceased individual’s assets. If the value does not exceed the state or federal lifetime exemption of $13.99 million, estate taxes are not levied. As of 2024, twelve states and the District of Columbia levy estate taxes based on the total value of the estate:
- Connecticut – $13,990,000
- District of Columbia – $4,873,200
- Hawaii – $5,490,000
- Illinois – $4,000,000
- Maine – $6,800,000
- Maryland – $5,000,000
- Massachusetts – $2,000,000
- Minnesota – $3,000,000
- New York – $7,160,000
- Oregon – $1,000,000
- Rhode Island – $1,802,431
- Vermont – $5,000,000
- Washington – $2,193,000
Inheritance Tax by State
An inheritance tax is a percentage of the overall value of the inheritance, collected from the beneficiary. The thresholds at which inheritance tax kicks in and the rates charged typically vary by the relationship to the decedent.
Even in states with an inheritance tax, family members are typically spared from tax, particularly if it’s a relatively small inheritance. As of 2025, five states that collect an inheritance tax include:
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
What Is the IRS Cost Basis for Inherited Property?
The IRS cost basis for inherited property is generally the fair market value at the time of the original owner’s death.
What Is the Tax Loophole for Inherited Property?
The step-up in basis for inherited property is often called a tax loophole for inherited property, but it isn’t technically a way to side-step paying taxes—it allows heirs to keep or sell property and pay taxes on any capital gains, not the entire value of the property.
What Is the Carryover Basis for Inherited Assets?
Carryover basis is different from step-up in basis, as it is a method for calculating the capital gains of a gift (not an inheritance) using the asset’s original purchase price.
The Bottom Line
The cost basis of an asset often helps determine the taxes a beneficiary will pay when they inherit the asset. For tangible assets, the cost basis is commonly “stepped up” using the fair market value on the original owner’s date of death. Death taxes, or estate plus inheritance taxes, can be levied at the federal and state levels.
[ad_2]
Source link