4 ms·

Interesting to me is that not-taxing inheritances is sort of a giant tax break. If your parent dies and they had bought a house for $100,00 and now it is worth

by graton 6y ago

Interesting to me is that not-taxing inheritances is sort of a giant tax break. If your parent dies and they had bought a house for $100,00 and now it is worth $1,100,000. So a capital gain of $1,000,000. If they had sold the house they would have had to pay capital gains on the house, minus an exemption amount ($250,000 for single and $500,000 for married). But you as the beneficiary get to take that house and immediately sell it and pay $0 in capital gains on it. So that tax is actually forgiven on death. If you held on to the house then you would pay capital gains on any gains from the value of it upon inheritance.

Judson 6y ago
IRS FAQ on inherited assets is pretty good here: https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances https://www.irs.gov/faqs/interest-dividends-other-types-of-i... Without any estate planning, you would pay $0 in capital gains because the basis resets to FMV at the time of death and the sale would be taxed as regular income (37% marginal bracket on $1,000,000 sale). By my reading, this doesn't seem like a giant tax break. Edit: Totally wrong. $0 taxes owed because basis is stepped up and sale is NOT treated as income.
- graton 6y ago
  Well I paid $0 in taxes on my parent's death. And when we sold it no income tax was paid. Our accountant checked everything and made sure it was done correctly. From the page it does say: If you sell the property for more than your basis, you have a taxable gain. But your basis is set upon the FMV (Fair Market Value) of the property upon death of the decedent. The basis of property inherited from a decedent is generally one of the following: 1. The fair market value (FMV) of the property on the date of the decedent's death (whether or not the executor of the estate files an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return)). Also, selling a house is not typically considered income. It is considered a capital gain. So you don't pay income tax on sale of a house. There might be exceptions if you are a real estate investor, but I don't have any expertise in that area.
  - Judson 6y ago
    Yea, totally wrong here. My assumption was that a lot of estate planning would be required to avoid major taxes, but seems like the default choice is a pretty good deal (tax-wise) for those involved. Good to know!
  - voisin 6y ago
    You paid nothing but presumably your parents’ estate paid taxes on the deemed disposition at FMV less its basis.
    - graton 6y ago
      No, it did not.
      - voisin 6y ago
        So there was a bump in tax basis to FMV that essentially creates a tax free capital gain for the beneficiary?
        graton 6y ago
        Correct.
        lakis 6y ago
        Yes
zackees 6y ago
The house hasn't increased in real value. The increase in selling price is due to inflation of the dollar.
- voisin 6y ago
  Deflation of the dollar. Inflation of the asset. It is crazy that we pay taxes on nominal values and not real values.
AnthonyMouse 6y ago
The step up in basis is not really related to inheritance tax. Suppose you inherit the house and don't sell it. Then you're not getting any kind of tax break because you're not getting any money -- maybe there will be another housing crash in ten years and you'll lose the value, and right now you're just living in the house. But if you impose inheritance tax then there is a new tax that wouldn't be due if you were just doing what your parents were doing and not selling the house. You don't want to force people to sell their home in order to pay the tax on it. Meanwhile the reason for the step up in basis is that the alternative would make the property inalienable, because after several decades the majority of the value of the property is "gain" and then you never want to sell it because you'll lose so much value to tax. It makes it so people can't move even if it would be more efficient because the after-tax sale price isn't enough to buy a similar house somewhere else. And all the basis reset is really doing in most cases is accounting for inflation. If your parents bought an asset for $100k in 1950, its nominal value would now be over a million dollars even if its real value is still exactly the same, but then the government wants to claim that 90% of the value is taxable income. Indexing the basis to inflation would fix this, but then the basis reset would be irrelevant or inconsequential in the large majority of cases and could still be justified as not costing very much at that point and being a convenience because you don't have to track down the original purchase price of an asset that has been in your family for decades.

by graton 6y ago

Judson 6y ago

IRS FAQ on inherited assets is pretty good here: https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances https://www.irs.gov/faqs/interest-dividends-other-types-of-i... Without any estate planning, you would pay $0 in capital gains because the basis resets to FMV at the time of death and the sale would be taxed as regular income (37% marginal bracket on $1,000,000 sale). By my reading, this doesn't seem like a giant tax break. Edit: Totally wrong. $0 taxes owed because basis is stepped up and sale is NOT treated as income.

graton 6y ago
Well I paid $0 in taxes on my parent's death. And when we sold it no income tax was paid. Our accountant checked everything and made sure it was done correctly. From the page it does say: If you sell the property for more than your basis, you have a taxable gain. But your basis is set upon the FMV (Fair Market Value) of the property upon death of the decedent. The basis of property inherited from a decedent is generally one of the following: 1. The fair market value (FMV) of the property on the date of the decedent's death (whether or not the executor of the estate files an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return)). Also, selling a house is not typically considered income. It is considered a capital gain. So you don't pay income tax on sale of a house. There might be exceptions if you are a real estate investor, but I don't have any expertise in that area.
- Judson 6y ago
  Yea, totally wrong here. My assumption was that a lot of estate planning would be required to avoid major taxes, but seems like the default choice is a pretty good deal (tax-wise) for those involved. Good to know!
- voisin 6y ago
  You paid nothing but presumably your parents’ estate paid taxes on the deemed disposition at FMV less its basis.
  - graton 6y ago
    No, it did not.
    - voisin 6y ago
      So there was a bump in tax basis to FMV that essentially creates a tax free capital gain for the beneficiary?
      - graton 6y ago
        Correct.
      - lakis 6y ago
        Yes

zackees 6y ago

The house hasn't increased in real value. The increase in selling price is due to inflation of the dollar.

voisin 6y ago
Deflation of the dollar. Inflation of the asset. It is crazy that we pay taxes on nominal values and not real values.

AnthonyMouse 6y ago

The step up in basis is not really related to inheritance tax. Suppose you inherit the house and don't sell it. Then you're not getting any kind of tax break because you're not getting any money -- maybe there will be another housing crash in ten years and you'll lose the value, and right now you're just living in the house. But if you impose inheritance tax then there is a new tax that wouldn't be due if you were just doing what your parents were doing and not selling the house. You don't want to force people to sell their home in order to pay the tax on it. Meanwhile the reason for the step up in basis is that the alternative would make the property inalienable, because after several decades the majority of the value of the property is "gain" and then you never want to sell it because you'll lose so much value to tax. It makes it so people can't move even if it would be more efficient because the after-tax sale price isn't enough to buy a similar house somewhere else. And all the basis reset is really doing in most cases is accounting for inflation. If your parents bought an asset for $100k in 1950, its nominal value would now be over a million dollars even if its real value is still exactly the same, but then the government wants to claim that 90% of the value is taxable income. Indexing the basis to inflation would fix this, but then the basis reset would be irrelevant or inconsequential in the large majority of cases and could still be justified as not costing very much at that point and being a convenience because you don't have to track down the original purchase price of an asset that has been in your family for decades.