Asset Basis and the Future of the Federal Estate Tax

The federal estate tax has been a topic of conversation for quite some time now. However, the conversation is evolving to include Basis. So what is Basis? 

Basis is typically determined based on what you paid for an asset. This can be the amount you pay in cash, the amount of debt you incur in paying for the asset, or the value of other assets or services you exchange in return for the asset. Basis is then used for tax purposes to determine your gain or loss on the later sale of the asset. It is also used to determine depreciation, amortization, depletion and casualty loses. Your basis in an asset is not necessarily stagnant. For example, it can be increased by the costs of improvements or decreased by items such as depreciation.

Basis is determined differently at death than when property is gifted during life: 

While the estate tax uses a step-up in basis, the gift tax employs what is known as carryover basis. With carryover basis when you receive a gift of an asset from someone while they are alive, you take that person’s basis in the assets^. Thus, if you later sell the property you will have the same gain on the sale that the person you received the property from would have. Looking back at our example above with the commercial real estate purchased in 1995, this means that if the owner gifted the property to his or her child in 2021 and the child then sells it for $700,000, the child would owe capital gains tax on $500,000 because he carried over the parent’s basis of $200,000, even though the property was worth $700,000 at the time of the gift. Thus, you can see how different the treatment is between assets transferred by gift versus assets transferred at death.

As of now, there are several different proposals regarding how the federal estate tax will handle basis. 

See Casey Dorman Lawson, Asset Basis and the Future of the Federal Estate Tax, Mitchell | Willams, August 17, 2021. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

https://lawprofessors.typepad.com/trusts_estates_prof/2021/08/asset-basis-and-the-future-of-the-federal-estate-tax.html