Effect Death Has On Rental Property Cost-basis

Comments(3)

• 
  DaveT24th February, 2004

  1. YES
  2. YES

• 
  hrmort24th February, 2004

  Dave T.
  Thank You,Thank You for your quick and professional replies.
  The Creative Investor web-site is great and I plan to get involved

• 
  DaveT25th February, 2004

  hrmort,
  
  I sensed from your questions that your are fully aware of the cost basis calculations and my quick answers were only needed to confirm your conclusions.
  
  As I review this exchange, it occurs to me that other visitors to this forum my not be as well informed and may need a little more clarification. So, for this reason, I am repeating your questions and giving more detailed responses.Quote:#1: In the event 1 of the 2 joint owners of a rental property dies,does the original cost-basis change to the current value for the surviving owner's half (a spouse) when calculating capitol-gains upon an immediate sale?.A property is purchased by a married couple for $50K and titled jointly with each spouse having a $25K cost basis in their respective halves of the property. Many years later, one spouse dies and the property is appraised for federal estate tax purposes at $200K. The surviving spouse's half of the property still has its original basis of $25K, while the basis in the half of the property inherited from the deceased spouse is stepped up to its current market value of $100K (half of the $200K appraised value). This makes the surviving spouse's cost basis in the entire property $125K.
  
  Quote:#2: In the event both owners go down together like a plane crash, does the inherited rental property cost-basis change to the current value for the estate and then could be sold with very little,if any, capitol gain taxes due?Under the current tax law, this is true. However, in 2010 when the federal estate tax is repealed, the stepped up basis for inherited property also goes away. Property inherited in 2010 will retain its original basis established by the purchaser. In the example from above, if both spouses die in a common event, the property will be passed to their heirs at its stepped up basis of $200K until 2010. In 2010, the inherited basis will be $50K (reduced by depreciation allowed) in this example.
  
  Let's say that only one spouse dies next year and the surviving spouse dies in 2010. Then from the numbers in our previous example, the surviving spouse received a stepped up basis for the deceased spouses share of the property, making the surviving spouse's new cost basis in the property $125K. In 2010, the heirs inherit this property at a basis of $125K.
  
  In 2011, no one knows yet what the tax code will be and the stepped up basis rules may stay the same as for 2010. There is still time for Congress to change or repeal certain provisions of the current code or reinstate the stepped up basis for 2011.