What Is Tax Basis?

Death and Taxes...the only certainties. However, we can control how much of an assets value is subject to tax.


The following is a transcript of the video above:

Hello, I am here to talk to you today about what is tax basis. I get this question a lot, people are asking about giving property during their lifetime to their heirs to avoid having probate or having to do estate administration. And one of the things that I respond with often is that we may have a tax basis problem. 

Hi, I'm Don Rolfe, I'm the owner founder of Northwest Legal Planning. And if you have any questions about this by the way, or any other estate planning question, you can schedule a 30-minute free consultation with me at myestateplanmeeting.com. We can do it on the phone or meet in person and I'm happy to answer any questions about this topic or any other topic. 

But the reason tax basis comes up when we're talking about estate planning is generally we're referring to assets that are not liquid, so assets that have the ability to gain value over time, to appreciate. So real estate, collections of baseball cards maybe, comic books, crystal, rugs, paintings, those sorts of items that you purchase at one price, say $100, and 10 years later you can sell them for $200 because they have appreciated in value. 

So what a tax basis is is the value of the asset at the time that you acquire it. So if you bought a house in 1980 for $150,000 and you still own that home today, the tax basis for that home is the $150,000. And if today it is worth a million dollars then the difference between those two values, the current day value and the basis value is what potentially could be taxed. So in estate planning, the reason that we worry about what the basis is, is that when you pass away and leave something like that house that you bought in 1980 for $150,000 to an heir, they get what's called a step up in basis. So they no longer have to deal with that $150,000 basis. When you pass it on to them through your will or your trust, their basis increases to the value at the time of your death. 

So in the scenario that I just ran through, that would be a million dollars. So if they inherit that and they turn around and sell it for that million dollars, the difference between the basis and the sales price or what it's worth, is zero. So there's zero appreciation that's attributable to taxes. 

Now if they wait five years and sell it for 1.2 million, the difference between the basis of a million and what they've sold it for $200,000 or the market value, excuse me, 1.2 million, is that $200,000, which could potentially be taxed depending upon what type of asset it is. 

Here, it's a home, if they used it as their home they would probably fall within the exclusion amount. But that's why tax basis is important and why I encourage people not to try to do giving away of assets without understanding this concept. There are a lot of people that think that they can just put their child on their deed and at that point in time, when they die it'll just become the child's property. However, that does the child a disservice because we have to figure out what's the basis for that child when they sell it. Well, most likely they will inherit, they will get your original basis for their half interest when you gave it to them. And then when they receive the other half, they'll get a step up in basis. So the basis that they get will be somewhere in the middle. But it definitely will not be a full step in basis for the total property. And that can be a problem when they want to go sell it because there is a more appreciation that's going to be available for the government to tax. 

And this holds true for artwork and collections and all of those other things that I talked about at the top of this video. 

And if this is confusing for you, I mean let's be honest, we're talking about taxes, the Tax Code in the US, and every state. They're confusing, they're confusing to me, that's why I hire tax professionals to do work on estates because you need to have this, such minute knowledge of all of the intricacies of the Tax Code in order to understand it. But at a basic level you need to understand that before you start moving assets around and property around, there are tax implications involved. Not only that, but as I've talked about before, if you are going to put your child on as a joint owner of a piece of property that you own right now, that is a present day gift and that can trigger a gift tax. 

Taxes are coming from all over the place. And filing a gift tax return is not overly burdensome, but it's something that perhaps you don't wanna do, especially knowing that after you're gone and they have that property, it could involve even more taxes for your heir. 

But like I said, if you have any questions about this, if it seems confusing, or you have a scenario maybe you've gotten yourself into and wanna know if it can be unwound, please do schedule a consultation with me. I'm happy to answer any of those questions, you can get in touch and schedule a meeting with me by going to my estateplanmeeting.com and I'll, happy to answer any questions about this topic, any other topic. And if you're so inclined, we can talk about your specific circumstances and what kind of estate plan would be best for you and the types of strategies we can use to meet whatever goals, wishes that you have. 

Again, tax basis is the value that is assigned to an asset when you receive it. And through estate planning we worry about this and we talk about it because we can achieve a full step up in basis of the value and not have to worry about that original basis after you've passed away if we leave it to your heirs in the right way. Again, I'm Don Rolfe. Until next time, take care, bye

About the Author Donald Rolfe

Father, husband, entrepreneur, and owner of a trivia filled brain. I help families and individuals plan for the unexpected and end of life. Schedule a Complimentary Strategy Session to chat with me, get answers to your questions, and find out about your Estate Plan options.

follow me on: