Getting Started > Determine Your Basis

Inherited assets:

Your original basis would be the fair market value, or special use value if so elected, on the date of the decedents death, or on the alternative valuation date. The alternative valuation date is the earlier of six months after the decedents death or the date an estate is sold. This will usually result in a "stepped-up" basis for the heirs or new owner.

The method by which the stepped up basis is determined depends on the state in which you reside. This rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within one year before the decedent's death. You or your spouse gave the property to the decedent after August 31, 1981. Or the death occurred after 1981.

Stepped-up Basis - Stepped-up basis occurs when the fair market value of the decedents property is greater that the decedents basis at the time of death, or alternative valuation date.

Stepped-up basis in community property states - In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. When either spouse dies, the total value of the community property generally becomes the basis of the entire property, even the part belonging to the surviving spouse.

For this to apply at least half the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return. If an interest is left to more than one individual then the basis for each individual is the proportion left to them of the fair market value. For more information on community property see IRS Publication 555, Federal Tax Information on Community Property.

Stepped-up basis in non-community property states - If you reside in a non-community property state the surviving spouse would retain their current basis, which would be one half of the basis before the date of death. Plus a stepped-up basis of one half of the fair market value at the time of death, or alternative valuation date.

Special Use Valuation - Section 2032(A) of the Internal Revenue Code permits certain real property to be valued for Federal estate tax purposes on the basis of its "current use" rather than at the "highest and best use".