I know this has been discussed before but specifically say I have a relative with a property that they will end up paying tremendous capital gains on if they sell it outright.
Now say instead, they gave it to a relative, or it was inherited. Would there be a benefit to that with the step up basis?

Gift no, inheritance yes.
General rules, but applicable to most every situations.

It can be a HUGE savings in deferred taxes upon death. Current estate tax exemption is about $14,000,000, so for most folks that will exceed entire estate.

Key is to have a solid value at date of death. And keep track of it.

For stocks, pretty easy. For real property or a business, need to get a reliable appraisal in place ASAP.

quote:

Key is to have a solid value at date of death. And keep track of it.

For stocks, pretty easy. For real property or a business, need to get a reliable appraisal in place ASAP.

This for sure. I have tax clients that have told me "My brother & I my sold my dad's farm that we inherited 15 years ago". It is important to have an appraisal done on inherited property at time of death.

Knowing more than my fair share of real estate appraisers who, due to slowdown in the market are doing lots of divorce and estate appraisals, don’t wait 15 years to call your local appraiser to ask for a date of death appraisal. Get it as soon as reasonable as the death so the data is freshly available. Your appraiser will hate you if they have to go chase down decades old sales data.

Get that in a revocable trust asap, and duck the expenses of probate and get the stup up.

Be careful of lady bird deeds, many tax opinions say they lose the step up.

Thanks so much, guys. I’m doing my best here trying to help my folks and read my way through all the legalese.
My folks are trying to put this in a bow for us kids, but there’s a lot of loose strings. We have another mtg with the estate attny in a few weeks, and I’d like to be able to ask the right (and useful) questions.

I'm a big proponent of using trusts. Totally aside from step-up. The trust protects your relative's wishes against all manner of schemes. In addition, avoiding probate is a big deal. My father's estate was locked in NYC court for 4 years, and it was a super simple estate. Legal fees ate up any value that was there.

If they rent the property out in order to avoid selling, there are current tax implications. Income and depreciation. Depreciation recapture at their death, too. If they rent to the eventual beneficiary for a reduced rent, that has tax implications. They need to consult with a knowledgable financial professional for this route.

An installment sale to the eventual heir (with the property in a trust would still be my preference) has the profit only being taxed in proportion to that year's payments. Plus interest paid to them is taxed. Thus the taxes are spread out over many years. Their life expectancy vs the length of the installment sale might make this a viable way to avoid a big tax bite.

Other considerations would be if they might need the equity from the house to pay for expected expenses. They might have needs or desires for that locked up equity which outweigh the natural desire to avoid taxes. If your relative is married, when the first spouse dies then their half of the exclusion kicks in, and the survivor now will file taxes as a single person which has higher taxes. Finally, what might the future value do? Might they do better to sell now and pay taxes rather than wait but have the market drop?

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Originally posted by Timdogg6:
Get that in a revocable trust asap, and duck the expenses of probate and get the stup up.

Be careful of lady bird deeds, many tax opinions say they lose the step up.

Tim,
The lady bird deed seems to be a very Florida specific thing. My 80 something year old mother in law had one done for her free and clear home here in FL and the bennies are my wife and my wife’s brother. The benefit was sold as my wife and her brother get the same property tax basis.

Why would federal law regarding capital gain be affected by this ? If she dies my wife and her bro get the date of death tax bars for federal cap gains purposes right. ? The local county tax authority doesn’t care about that do they ? Or is the theory it’s more like a life estate and she’s given away ownership during her life ?

This tool seem to have been around for decades, has there been no case law testing it ?

Stepped Up Basis. Put another way, He who dies with the most appreciated assets wins!

And, yes, get that appraisal as close to the date of death as possible.

Gifts have a carryover basis. Recipients (donee) basis is equal to the donors basis. No step up on death of the donor presuming that it was a "completed" gift.

I'm not a tax attorney but several have cautioned me to be careful in using them as if improperly drafted they will lose the step up.

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Originally posted by Fly-Sig:

An installment sale to the eventual heir (with the property in a trust would still be my preference) has the profit only being taxed in proportion to that year's payments. Plus interest paid to them is taxed. Thus the taxes are spread out over many years. Their life expectancy vs the length of the installment sale might make this a viable way to avoid a big tax

Maybe. Installment sales of depreciable property such as the rental property described above to RELATED PARTIES are specifically excluded from the tax deferral advantages available for a sale to a non related party.