Casey Dorman Lawson, of Mitchell, Williams, Selig, Gates & Woodyard, P.L.L.C., has made available for download her article, “Asset Basis and the Future of the Federal Estate Tax”, published in JDSUPRA. The abstract is as follows:
The federal estate tax is often a topic of conversation especially in regards to the tax rate and the applicable credit or exemption amount; however, currently another aspect of the estate tax is getting attention – Basis. In order to evaluate and understand the proposed changes to the estate tax law you must first understand what basis is and the different ways that basis can be determined for tax purposes.
Basis is typically determined based on what you paid for an asset. This can be the amount you pay in cash, the amount of debt you incur in paying for the asset, or the value of other assets or services you exchange in return for the asset. Basis is then used for tax purposes to determine your gain or loss on the later sale of the asset. It is also used to determine depreciation, amortization, depletion and casualty loses. Your basis in an asset is not necessarily stagnant. For example, it can be increased by the costs of improvements or decreased by items such as depreciation.
But how is basis determined if you inherit the property from someone else at death? You did not pay for the asset, so is your basis zero? In most cases, the answer is no, your basis is not zero. Under the current estate tax law when you receive an asset from someone at their death, your basis becomes the fair market value of the asset on the person’s date of death.[i] This is often referred to as a step-up in basis.[ii] This step-up in basis allows for the gain that occurred in the asset during the life of the decedent to escape capital gains taxation…
Posted by Marin Larkin, Associate Editor, Wealth Strategies Journal.