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How to Calculate Cost Basis for Inherited Real Estate

Original post by C. Taylor of Demand Media

Inherited real estate's cost basis steps up to avoid tax on appreciated property.

The cost basis for real estate is used to calculate the profit gained when you sell a property. The cost basis is typically the purchase price, but for inherited real estate, that is not an option, because you never actually purchased it. Therefore, special rules apply in determining your cost basis, depending on when the decedent died. In all years, except 2010, the cost basis stepped up to the fair market value on the date of the decedent's death.

Step 1

Take note of when the decedent passed away. If he died in 2010, then the cost basis carries over, so you will use the decedent's original cost basis. This might be the purchase price or a step up cost basis, if he inherited the property. In addition, there is a total step-up basis of $1.3 million, or $4.3 million for surviving spouses, which increases the cost basis. This basis increase is applied to the total inheritance, not just real estate, so you may choose to use all, or none, of it on the real estate. As an example, if the owner's cost basis was $250,000, but the property appreciated to $2.5 million, your cost basis would be $250,000, plus $1.3 million. This is assuming you elected to apply the entire cost basis addition to real estate, and were not a surviving spouse. Therefore, your cost basis would be $1.55 million.

Step 2

Contact the executor of the will and ask if he's elected to use an alternate date when determining cost basis. In all years, except 2010, executors may elect to use a date six months after the decedent's death. If he did not elect to use an alternate date, then the date of death is used.

Step 3

Contact a real estate appraiser and request an appraisal be performed for that date. This appraisal tells you the value of the property on that date, which serves as the cost basis. For example, if a property was original purchased for $250,000 and it appreciated to $2.5 million by the date of death, or the alternate date, your cost basis would be $2.5 million.

                   

References

About the Author

C. Taylor has been a professional writer since 2009. He has written for online publications and the "Journal of Asian Martial Arts." Taylor specializes in martial arts, traveling, sciences and computer repair. He received a Master of Science in wildlife biology from Clemson University and a Bachelor of Arts in biological sciences from the College of Charleston.

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