Up until 2010, property owned by a decedent at the time of
death of his death had its tax basis changed from what the
decedent's basis was to its fair market value - whichever
was higher. For the year 2010 - and only that year - the
law has been changed to 'whatever is lower'.

This change will generally cost inheritors of decedents who
die in 2010 more taxes down the line - especially for those
inheriting houses. Here's why.

Over the long run, most equities tend to increase in value.
The owner of an equity property has a tax basis in it
that's usually the price he paid for it. As time goes on,
with all things being equal, the fair market values of
equities tend to increase - if only by the effects of
inflation.

A prime example is a house. Typically a house owned by a
decedent at his death has a tax basis to him that's
considerably less than its fair market value at the time of
his death. In that case, an inheritor of a house from a
decedent dying in 2009 had the house's tax basis stepped-up
to its fair market value.

That means if he sold the house right away, at its fair
market value, he'd have no capital gain tax to be paid
since the selling price equalled the it's tax basis
(stepped up to the fair market value). The stepped up basis
would always benefit him no matter when he sold, too.

But now, under the same situation but for the decedent
dying in 2010, the inherited house received by the
inheritor with the same tax basis as it had in the hands of
the deceased. That's because, according to the 2010 law,
the lesser (and not the greater) of the fair market value
or the decedent's basis becomes the inheritors basis.

So if the inheritor sold it right away or sometime in the
future, he'd have a capital gain tax to pay based on the
extent to which the selling price's fair market value
exceeds the decedent's considerably lower tax basis. This
law change comes from the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA). It provided for the
repeal the law which gave the 'whichever was greater'
provision at death for the change in tax basis for those
dying after 2009. But remember, EGTRRA also eliminated all
estate taxation for 2010. It was hoped that in 2001, we
wouldn't need the estate tax after 2009.

Fortunately, the 'whichever is less' provision should be in
effect for estates of those dying during 2010 only.
Presumably, legislators will get their act together during
this year and arrange to bring back the usual 'stepped-up
basis' (corresponding to 'whichever is greater') that
estate property received.

Unfortunately their actions will most likely bring back the
estate tax with it too.

----------------------------------------------------
Shane Flait gives you workable strategies to accomplish
your goals in financial, legal, tax, retirement and
protection issues. .
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