Step-Up in Basis (IRC 1014a)

Below are some of the questions you may be curious to know:

What properties qualify for step-up in basis?

Any capital gain assets such as real estate, stock, bond, and so on.

 

What are the community property states?

There are nine community property states: Arizona, California, Idaho, Louisiana,Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska is an opt-in community property state that gives both parties the option to make their property community property.

 

If I am married and live in community property state, what step-up in basis can I take?

To illustrate this, let’s assume Mike and Jane Doe live in California.  The property they bought for $100,000 is classified as community property.  If Mike die then not only does the decedent’s share of property receive a new basis but also the surviving spouse’s share, Jane, receives this same basis.  However, this requires that at least one-half of the community property is included in, Mike, the decedent’s gross estate.  When Mike die, the property is worth $1,000,000.  Therefore, the step-up provision allows Jane to establish a new cost basis of $1,000,000.

 

What is the step-up in basis in non-community property state?

To illustrate this point, let’s assume John Doe bought an investment property with his wife, Jane, for $100,000.  Each contributed $50,000.  Ten years later, Jane die, and the property is valued at $1,000,000.  John can take a step-up in basis of Jane’s portion, which is 50% of $1,000,000 or $500,000.  Adding this amount to his own cost basis of $50,000 yields an adjusted cost basis of $550,000.

 

What is the potential downfall of holding title as joint tenancy while living in community property state?

To illustrate this point, let’s assume John Doe bought an investment property with his wife, Jane, for $100,000.  Each contributed $50,000.  They held title to this property as joint tenant.  Ten years later, Jane die, and the property is valued at $1,000,000.  In this case, John’s adjusted basis would be Jane’s step-up in basis of $500,000 plus his basis of $50,000.  This result in $550,000 instead of $1,000,000 of adjusted basis.