October 1

Step Up Basis for Capital Gains

Cortes Law Firm Oklahoma City Estate Planning Attorney

No more Step Up in basis?

No more step-up in basis for capital gains purposes for property that's not included in the taxable estate upon death.

The IRS just came out with a new ruling, I believe it's ruling number 2023-2, and it might have a drastic effect on how capital gains is taxed.

First of all you've heard me talk about Step Up basis for capital gains purposes in many other videos. Basically it goes like this if you are a parent and you purchase a house say in the 1970s for ten thousand dollars.

When you die that house is worth two hundred thousand dollars. You give the house to your children as part of your estate.

Whether it's a will or by intestate succession they inherit the property at the Step Up basis of two hundred thousand dollars for capital gains purposes. That means if they turn around and sell that house for two hundred thousand dollars there's no capital gains due.

However the a mistake that a lot of parents make is that they try to give that property to their children before they die.

If that same parent bought that house for ten thousand dollars in the 1970s and they gave it to their children today in 2023 and the house is worth two hundred thousand dollars the parent has triggered a capital gains event of a hundred and ninety thousand dollars.

I know what you're gonna say because we get it all the time in our comments.

The comment section always has several folks that state "I fixed it because they only sold it to me for a dollar."

It doesn't matter what you sell it for. What matters in the eyes of the IRS is what the actual appraised value of the property is on the date of transfer.

So, if your parents give you a piece of property during their lifetime and it's valued at two hundred thousand dollars and they bought it for ten thousand dollars, then there's a capital gains event of a hundred and ninety thousand dollars that taxes have to be paid on.

Why is IRS ruling 2023-2 important?

The IRS ruling important for estate planning because it has to do with the taxable estate. If property is transferred after your death and it's part of your taxable estate, then in that case the Step Up basis will still apply 

If you have a revocable living trust and you've put a piece of property in there and you say that when you die that property goes to Enrique.

Enrique will inherit that property as of 2023 at the stepped up basis of two hundred thousand dollars instead of the ten thousand dollars that Mom and Dad bought the house for in the 70s. The same goes if it was transferred during the probate process.

Irrevocable Trusts

Where this ruling affects people is on irrevocable trusts.

You always hear me talking about revocable trust but there is also something out there called an irrevocable trust that people use for purposes of going into assisted living. When you go into assisted living you have to draw down your assets to a certain point before government benefits start to kick in.

What a lot of people do is they put their money and their house into what's called an irrevocable trust. In an Irrevocable trust they essentially cannot control the property anymore. They are usually the beneficiary of the trust, but no longer have control.

Taxable Estate

The question has become whether or not on death that property is part of the taxable estate when a person dies. This ruling is basically saying that if your property is in an irrevocable trust they are taking the position that when you die that was not part of your taxable estate anymore.

That means that if it's not part of your taxable estate the capital gain should apply and you don't get the Step Up basis. Under this ruling, if you have your house in an irrevocable trust you still give it to your son Enrique.

Now, Enrique is not going to get the advantage of having that step up basis of two hundred thousand dollars. Instead he's going to inherit the property at the appraised value of when you originally purchased the property at ten thousand dollars. That means that when Enrique decides to sell that house he is going to have to pay capital gains on a hundred and ninety thousand dollars.

You see how significant this ruling could affect people if they have created an irrevocable trust and put real estate or other assets that can appreciate into the irrevocable trust. Their heirs may be slapped with a very huge capital gains tax.

This is going to cost thousands and thousands of Estates thousands and thousands of dollars. If you're in that position it might be a really good idea to talk to your estate planning an attorney and your tax professional.


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