Did you inherit real estate from a deceased spouse? The internal revenue code has special tax treatment for valuing the basis of inherited property regardless if you have estate tax filing requirements and no doubt this will impact you.

If the inherited property has appreciated in value, the surviving spouse will generally receive a step up in basis of the inherited property to the fair market value (FMV) at:

        1) the date of decedent’s death or

        2) on the alternate valuation date (within 6 month of the date of death).

Further, in community property states (i.e. California, Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), married individuals are typically considered to each own 50% of the community property. As such, when either spouse dies, the entire value of the community property, including the part owned by the surviving spouse, receives a step up in basis to the FMV. For this rule to apply at least 50% of the value of the community property must be included in the deceased spouse’s gross estate regardless if the deceased spouse’s estate must file a estate tax return.

These rules can come in handy when a surviving spouse is in need of liquid capital. It should be noted that this special tax treatment can have adverse consequences if not handled correctly. Consult your tax adviser for more information.

Sources:

IRC 1014

IRC 2032

Publication 551

Publication 555