ARE YOU MARRIED?
HOW YOU HOLD TITLE TO REAL ESTATE MATTERS
What is a double step-up in basis and why should you care?
When someone passes away and they leave real estate to a spouse, a child, or another person there are different income tax rules that apply. If the real estate goes to a child, or a friend, that person receives a step in basis for income tax purposes to the fair market value at the date of death.
For example, Joe Smith bought land in Texas many years ago for $100,000. When he died it was worth $1,000,000. If he left it to his child they would get a step-up in basis to $1,000,000. If the child sold right away there would be NO income taxes for them to pay.
Assuming that Joe Smith bought the land with a friend, each paying $50,000 for their share, and they took title as tenants in common. If Joe left his share of the land to his co-tenant, that co-tenant would get a step-up on Joe’s share to $500,000 and keep his original basis of $50,000. His new basis for gain or loss is now $550,000.
If Joe had bought the land with his wife, and they took title as community property, his surviving spouse would get a step-up on Joe’s share and also her share. Therefore, her basis for gain or loss is now $1,000,000. If she sold right away she would pay no IRS or California income taxes on the sale. In fact, she might have a small loss because of broker fees, title and other expenses of the sale,
If title is held in a revocable trust it is critical that the trust document clearly spells out that the property is community property. Often, there is a Schedule of Asset that is attached to the trust document. It is critical that the taxpayer be able to show the property is actually community property. Otherwise, the IRS may disallow the double step-up.
There is also the triple step-up when the original surviving spouse passes away. At that point, the people who receive the property get another step-up in basis.
Many times married people take title as joint tenants or tenants in common. The IRS rules are strict and those folks might lose the benefit of the DOUBLE STEP-UP IN BASIS. If you are married, how do you hold title??? You should find out and correct the legal title so that you can take advantage of the beneficial rules from the IRS (actually the U.S. Congress).
Warning – Please contact a knowledgeable attorney or other real estate professional before taking any actions with respect to changing how title is held.
