Stepped-Up Basis on Property Held By a Living Trust

Property held by a living trust will be entitled to the stepped-up basis of market value on the date of death of the person who created the trust.

The person who creates a living trust is called the settlor.

To determine the stepped-up basis of the property held by a living trust, a professional real estate appraiser should document the value of the property of the date the settlor(s) passed away.

Being able to use the stepped-up basis on the death of the settlor for property held in a living trust is a good thing. This is because when you inherit property, you want to have its value be calculated on the date the person passed away, not when the person first acquired the property.

For example, the settlors John and Jane Smith (remember this is the a legal term for the persons who created the living trust for the property) first purchased their home in California in 1977 for $60,000. When they both died twenty-five years later, their home was now worth $460,000. 

Let's say you sold this property a year later for $500,000. Entirely possible in today's real estate market.

Do you pay capital gain taxes on the difference of $500,000 minus $60,000 or $500,000 minus $460,000? If you inherited this property through a living trust or through other means (say probate), you would use the stepped-up basis to determine taxes owed, if any. Thus, inheriting property through a living trust means that you would have to pay taxes, if any, on $40,000 if there was not an exclusion otherwise.

A common exclusion that may apply is if the inherited home was your primary residence.

As an aside, if you obtained ownership of this property before someone died -- say, your Mother put you on title a year before she passed away, you would have to pay taxes on her original basis of her purchase price minus your sale price. In other words, $500,000 minus $60,000 making the amount subject to taxes to $440,000. Ouch.

Comments

[George Packer]

On a property held by a married couple in a family trust, does a surviving spouse receive a stepped-up basis as of the date of death of the other spouse?

[Jennifer Sawday]

Yes, real property held by a married couple will received the stepped up basis on the death of the first spouse. In California, with community property, both portions of the community property receive a stepped-up basis at the death of the first spouse. So if you transfer title of your jointly held home to community property and then to the trust, you are confirming that the home was indeed community property and will receive the double stepped up basis.

[Bush]

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[Britney]

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[Gary Garfinkle]

I would appreciate your view on what basis applies to this:
Husband & wife made separate trusts with 50% of each parcel in each trust & separate generation skipping terms. H dies in 1980; then W dies in 1995. Property is sold in 2008 for the 1st principal distribution to grandchildren.
Is the step-up 100% to 1995 value, or 50% to 1980 & 50% to 1995?
I look forward to your response.

[Gary Garfinkle]

I would appreciate your view on what basis applies to this:
Husband & wife made separate trusts with 50% of each parcel in each trust & separate generation skipping terms. H dies in 1980; then W dies in 1995. Property is sold in 2008 for the 1st principal distribution to grandchildren.
Is the step-up 100% to 1995 value, or 50% to 1980 & 50% to 1995?
I look forward to your response.

[Britney]

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[ROBERT AUSTIN]

WONDER IF MY DAD DIDNT PUT ALL IS HOUSES, OF 30 EACH INTO LIVING TRUST, AND MY DADS DIES, DOES THE 15 HOUSES HE PUT INTO LIVING TRUST BE OK FOR STEP UP BASIS, BUT DO THE OTHER HOUSES GO TO PROBATE? OR DOES MY STEP MOM GET THOSE HOUSES, QUESTION IS, MY DAD DIES 3.16.08, AND MY STEP MOM IS TRUSTEE, OF THIS SO CALLED STEP UP BASIS, AND IM NOT SURE IF MY DAD LEFT INSTRUCTIONS IN THE TRUST FOR HER TO GIVE US 2 PROPERTY EACH HE SAID IN HIS JOURNAL HE WANTED TO GIVE US, SO WHAT DO I DO TO CHECK IF HE TRANSFERRED ALL IS PROPERTYS TO LIVING TRUST, AND HOW TO I CHECK ON ALL THIS

[Bruce Eiter]

Does a personal service business,like an insurance business get a stepped-up basis?

[Richard Patterson]

What are the ramifications of the repeal of the step-up basis in 2009 and how it affects the basis left to the spouse as joint tenants or tenants in common.

[Chris]

We live in So Cal, LA county. My wifes parents own the home we live in free and clear. They want to gift us the house, which in turn we will take out money against it so her father can retire. How can he be safe on paying taxes? Would they have to use the Million gift tax exemption. They pd 30k in 1970, today it's worth 600k difference of 570k, or do we work on yearly incrimental lump sums.

[Laura Sprague]

I am wondering if a home that is "homesteaded" can be put into a trust? also, if having a homestead home can cause difficulty in obtaining benefits such as Medi-cal should long term care be needed ?

Thank You,

Laura

[Leslie]

Does the stepped up basis law have the possibility of being changed when congress adjusts the inheritance tax exemption laws?