2010 is here . . . and step-up is now carry-over

The Economic Growth and Tax Relief Reconciliation Act of 2001 covers A LOT of ground and has literally been a moving target for the past nine years.  Each year various estate tax-related thresholds have changed, according to the act – one of these is the ‘step-up’ in basis for calculating taxable gain on property inherited upon the death of its owner.

‘Basis’ – as generally applied to property – is the purchase price, and is referred to when calculating the taxable gain upon sale of the property.  The greater the gain in value of property, the greater the taxable gain.

In estate tax lingo, the ‘step-up’ in basis permits the value of inherited property to ‘step-up’ to the value of the property at the date of death of the owner.

As of January 1, 2010, the ‘step-up’ calculation is replaced by the ‘carry-over’ calculation.  Generally, the premise of ‘carry-over’ in basis requires that the basis of inherited property remains the same as it was for the deceased owner.  This has the potential effect of increasing the taxable gain when the property is sold.

When property is inherited in 2010, an heir can choose to take a ‘step-up’ in basis up to $1.3 million; for any amount over this maximum, the heir’s basis will be the smaller of deceased owner’s basis or market value as of date of death.  However, a spouse can claim an additional step-up of $3 million, for a total of $4.2 million.

When planning for the proper disposition of your estate, it’s important to understand what the current tax rules are, and how they apply to your property.  Since the 2001 Act expires at the end of this year (2010), perhaps these rules will be less of a moving target.  But it remains to be seen what Congress will do in this area. So stay tuned, and stay informed.

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