Matter & Substance
  October 21, 2015

Tax Basis Planning- Taking the Right Steps

In continuing our observation of NEPAW, I think it's important to examine the increasingly effective, but often complex, area of tax basis planning. As discussed in my previous blog, the heightened importance of income taxes while planning one's estate may lead to gifting and shifting of income during one's lifetime. However, it may also mean that it is more advantageous to hold on to your assets in your estate rather than giving them away during life. Huh?

When an appreciated asset is inherited, the recipients' basis is "stepped up" to the assets' fair market value on the date of death. This means that from an income tax perspective, there's an advantage to retaining assets until death. There is also, however, a corresponding "step down" in basis to the assets' fair market value on the date of death. Because of this planning paradox, each person's situation is different and should be carefully reviewed.

Here are a couple situations in which it makes sense to hold your assets:

  • If the taxpayer has a low basis stock and doesn't need to liquidate prior to death- in certain situations it may be even more advantageous to utilize a margin loan rather than recognize gain
  • If the taxpayer has fully depreciated rental real estate property- the recipient will receive a step-up and will have the ability to depreciate the property again

Here are a couple situations in which it makes sense to sell or gift your assets:

  • If the taxpayer has assets with a high cost basis that would be "stepped down" to fair market value- it may make sense to harvest losses prior to death when there are current year gains
  • If the taxpayer has low value stock with high basis, they can gift it to a donee who plans to hold on to the investment- typically, the basis of an asset carries over to the donee, however it is limited to the FMV on the date of transfer in a loss situation. Should the asset increase in value and surpass the original cost basis, this higher amount is used in calculating gain.