Disinherit Uncle Sam
March 10, 2008
Tax free income. Is there such a thing? I am the type of guy that
believes in paying my fair share of taxes. That being said I will also
use every legal tax law in place to minimize the taxes I owe, as we all
should. One such legal loophole exists when you inherit property and
sell it. You may be able to keep 100% of the proceeds from the sale
Here is the deal. Normally you would have to pay tax on gains you make
from the sale of property. For now we will leave your personal home on
the back burner as a sale of your main home is usually tax-free. Lets
say you bought vacant land 10 years ago for $5000. You sell it today
and receive $100,000 for it. You would owe tax on $95,000. The tax
rate for Federal and Michigan would be around 20%. This means you
would owe about $19,000 in taxes on the sale.
However, lets continue with the above example and say the client
inherited this property from their parents and sold it for $100,000.
With inherited property we are allowed to figure a STEP UP IN BASIS for
the property sold. What that means is that we will use as a basis of
the property, the value of what it was as of the date of death of the
person you inherited it from. Lets say on the day their parents passed
away, the property was valued at $100,000. That $100K becomes the new
cost basis for the person that inherited it. This means that if our
cost in the property was $100K and we sold for the same $100K, then we
will have zero income to report on the sale and thus pay zero taxes!
The STEP UP IN BASIS rules can also apply to the surviving spouse.
Lets say a married couple that goes by the name of Jack and Jill, own
property on a hill. The both of them purchased this property way back
in 1950 for only $3000. Lets say Jack passed away and Jill decided to
sell the property on the hill. She sells it for $50,000. Doing the
math she would owe tax on $47k and would have to pay in around $8,000!
However, since you now know the special rule for STEP UP IN BASIS, you
can trim her taxes by almost 50%! Here is how we do it. We are
allowed to step up his half of the property to its current value on
date of death. Lets again say it was worth $50K when he passed. His
part of the basis would be $25,000. Jill would still be at $1500 for
her basis, so the total basis Jill could use when she sold the property
would be $26,500 instead of only $3000. Which means a total tax
savings of around $4,000! Do not forget you can also add into cost
basis the amount of any expenses relating to the actual sale such as
closing costs. What a tremendous tax loophole!
Be aware however, that if their parents would have deeded over the
property to them before they passed away, we could not use the STEP UP
IN BASIS rules for figuring a new basis. The basis would then be
whatever the parents originally paid for the property and we would be
back to paying in $8,000. Keep this in mind when planning for the
The numbers can be confusing to work through. If your in a situation
where you are inheriting property, make sure to see us. It could
easily save you thousands of dollars. Also, if you have had this
situation in the past and it was not handled properly you can always go
back and amend to make it right and possibly receive a refund!