Where’s My Step Up

• March 25, 2010
• Paul Neiffer

Some of my readers may have noticed that I have started writing a blog on the Agweb.com site.  From my web traffic, I can see that many of those readers have checked out this site.  I am honored to be doing the blog, but with three weeks left in tax season, I am hoping that I can keep up the pace.  Many times I will post the same content on each site, but there will be times when it is unique to one or the other.

I got an interesting question from a reader on the Agweb site and I am posting that post here for your review.  The estate tax situation for this year is the craziest I have ever seen it in my 25 years plus as a CPA and who knows how it will end up.  This is a reply to a question that I think many farm families will have.

Here is my original post:

We have gotten a response from one of our readers asking the following:

“Our mother has transferred the farm to her two sons and there is a clause stating they will get a step up in basis when she passes away.  They are wondering if she dies in 2010, will this property get a step up in basis?”

There are not enough facts in the question to make a complete answer, but I will outline what the rules are for 2010 as they stand now.

Under the old law, any assets passing to a heir received a step up or down in value to what it was worth at the time of death (or in some cases 6 months after death).

For 2010, this rule has been eliminated.  This means any property passing to an heir will have a basis equal to the lessor of:

• Their current basis (in most cases this is the cost) of the property, or
• Fair market value

The estate can make an election to write up any property to fair market value not to exceed $1.3 million to be allocated to any asset (or $4.3 million if the assets are going to a surviving spouse).  The estate will also have to file a report with the IRS and the heirs letting them know what the basis of all assets are.

So, in our readers case, if Mom bought the land for $200,000 50 years ago and it is now worth $5,000,000, there is:

• No estate tax owed;
• The estate can step up the cost basis to $1.5 million;
• And the remainder of $3.5 million will be subject to capital gains tax when sold, which may be upwards of $800,000 assuming current federal and state income taxes.

Also, many states will assess an estate or inheritance tax if the estate exceeds a certain amount.

This means that income tax planning for 2010 estates is very complex and we are waiting to see if Congress will fix this.  We will keep you posted.

Tags: Estate Tax, Step Up in Basis, Farm Taxes, Legacy Planning | Comments Off on Where’s My Step Up