If property is held by someone at their death, the “basis” in the property used by the seller to determine taxable gain on its sale is re-set to the fair market value at the date of death.
Income and capital gain tax rates have increased over the last 10 years, and during that time the exemption to avoid estate tax has increased dramatically. This combination (which did not generally exist before now) creates a tremendous opportunity to reduce income tax on property sales. There are many ways to do this. One simple technique is to transfer a highly appreciated asset to a parent. When Mom or Dad passes away, the basis in the asset is increased to its fair market value at the date of death (even though there is no estate tax), which can eliminate income tax on the gain on a sale thereafter, or permit much greater depreciation deductions when re-acquired by the owner.
So for example, if basis is stepped up by $1,000,000, then the tax on sale of the asset will be reduced, which tax savings could easily be $300,000. Note this is an after-tax savings!
There are related issues that should be addressed to protect the asset, account for timing and further enhance the tax benefits.
To discuss this further please contact Les Raatz, Member of the Phoenix office, 602-285-5022 or firstname.lastname@example.org