What is the basis in property that you receive via right of survivorship? This is an important question for tax and estate planning purposes. For tax purposes, your basis will impact your gain upon the sale or exchange of the property. For estate planning purposes, you may hold property differently or gift certain property differently depending upon whether such property will receive a step up in basis or a carryover in basis. The article below has been prepared by a tax attorney at The McGuire Law Firm to provide additional information regarding this issue.
Prior to revision the Internal Revenue Code only allowed a step up in basis to the fair market value of the property at the date of death if the property passed from decedent by a bequest, inheritance or devise. Thus, property held jointly did not receive a step up in basis because the property was viewed to have been acquired via a lifetime transfer, not an inheritance, bequest or devise. When the Internal Revenue Code was later amended, Congress must have considered why a step up in basis for jointly held property would not be allowed when the property was included in the gross estate of the decedent for estate tax purposes. Therefore, the code was changed to allow a step up in basis for property passing to the survivor of a joint interest. The basis of the property could be stepped up or increased to the fair market value as of the date of death, or on the alternative valuation date if an alternative valuation date was elected. It is important to note that joint property treated as income in respect of decedent under Section 691 of the Internal Revenue Code, is an exception to the current rule and thus does not receive the step up in basis.
What happens if only a portion of the joint property is included within the estate of the first joint tenant to pass away? The survivor’s basis may be determined in part by the rules of Section 1014, potentially receiving a step up in basis and in part by reference to the basis of the survivor before the deceased joint tenant’s death. This can be troublesome for the survivor, if the survivor received the property through titling (for example as tenants by the entirety) because the transfer can predate certain code sections and the transfer may not be treated as a gift. Thus, could one tenant’s basis be zero?
Given the benefit of a step up in basis, individuals need to plan carefully when orchestrating their overall estate plan. Under certain circumstances, it may be better for an individual to inherit property as opposed to a life time gift. Of course, each individual’s circumstances are different and should be discussed with their tax attorney and/or estate planning attorney.
You can contact The McGuire Law Firm to discuss your estate and gifting matters with a Denver estate planning attorney, and discuss the tax implications of certain gifts with a tax attorney.