Saturday, May 18, 2013

The Cost Basis and Holding Period of Inherited Property

If you inherited property and are planning on selling it, you may be wondering how to treat the gain or loss. First, the basis of the property is its fair market value at the time of the decedant's death. This is usually referred to as "step-to fair market value". So, you don't have to worry about what the decendant paid for the property, just what is was worth when they died.

You can see that this is probably beneficial because many things, such as real estate, appreciate with time. Plus, it might be really difficult to determine the original cost because the property could have been purchased many years (decades) ago.

The holding period of the inherited property is characterized as long-term, regardless of when the decedant purchased it. This is another break because of the low long-term capital gains rate compared to the short term cap rate.

There are exceptions for the step-to FMV treatment.  For example, IRAs and 401(k)s.

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