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Subject:  stepped-up value
From:  Doug
Date:  Wed, 21 May 2003

A client of mine has asked me about stepped up value. What exactly does this pertain to? He lost his wife last year and is getting ready to sell his home and an adjoining piece of development property. (From a real estate broker.)

Doug

Answer

Date:  2 Jun 2003

Hello Doug,

You should tell your client to see a CPA and an attorney. There may be tax and legal requirements to be attended to relating to the death of his spouse.

"Stepped up basis" refers to a basis adjustment that happens at death according to the rules explained at Internal Revenue Code § 1014. Generally, the tax basis or "cost" used to determine gain or loss of inherited property is adjusted to the fair market value on the date of death or the alternate valuation date. (The alternative valuation date usually doesn't apply for spousal transfers.) Although assumed to be a "step up" or increase for inflation, the basis can also be "stepped down", such as for a used television or personal computer. The holding period is also adjusted to "more than one year", so a gain or loss will automatically be long-term.

Different rules may apply, depending on whether the property was held as community property, joint tenants, or separate property. A competent CPA will be able to tell your client the difference.

Good luck!
Mike Gray

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