Under the
SilGro home page for Alan Silverstein and Cathie
Grow
Email me at ajs@frii.com
Last update: March 29, 2025
Reminder: Use the "step-up of cost basis at death" to avoid possibly massive US federal capital gains taxes on appreciated capital assets.
In particular, for co-owned capital assets (like a primary home for a couple), if the survivor sells the property (possibly many years) later with a large gain since purchase, this subtle aspect of an otherwise well-known step-up provision can possibly nullify tens of thousands of dollars in taxes.
Takeaway: If you or someone you know loses a co-owner on a significant asset, such as a spouse and a house, make a written note of the market value of the asset as of the date of death for possible use much later. Even a Zillow "Zestimate" is way better than nothing, and it could be unavailable after enough time passes. Upon asset sale you can add to the original (or adjusted) cost basis half of the asset's market value at the time of the first owner's death, thereby greatly reducing the taxable gains. Except: In nine community property states, you can add 100% of the value; check your local rules.
Details: Here's the situation that motivated me to create this webpage... My parents bought a retirement home in 1980. Dad died in 2011. Mom finally sold the house in 2024 (after 44 years) with enough of a gain beyond the original purchase cost to exceed the $250k single-filer exemption on the sale of a primary home (lived in for at least 2 of the last 5 years, etc). I prepare her tax returns, and I mistakenly estimated that this transaction would cost her about $20k in extra income tax (on long-term capital gains).
I knew about the general step-up of cost basis, which is a nice "gift" buried in the US federal tax code. In fact for "tax efficiency" I advise other people to consider passing capital assets (like rental houses) to their heirs rather than selling them late in life, if they don't really need the money (or have other sources). But I didn't remember this bit about the treatment of half (or all) of a co-owned asset. Nor did TurboTax remind me either, even viewing a "Learn More" popup. If a relative hadn't mentioned it, leading me to do some web study, I would have screwed up big time!
In Mom's case the hidden half-step-up back in 2011 meant that her net gain was under $250k, and no income tax was due. (Net gain = gross sales price minus true sales expenses not including prorations, minus original or adjusted cost basis, including the step-up.)
Furthermore to my surprise, if you don't receive a 1099-S and don't owe anything, you don't even report the house sale on your tax return! Apparently her title company did file a 1099-S with the IRS, but they didn't send us a copy, which I thought was a "bug", but is actually a feature...