Dear Liz: You recently advised the heir to a triplex that they’d have to pay capital gains tax if they sell the property, but if they keep it and bequeath to their children, there would be no capital gains for the children. How does that work?
Answer: The original letter writer inherited the property from a parent in 2007. The inherited property got a favorable “step up” in tax basis to the fair market value at the date of the parent’s death. As a result, all the appreciation that happened during the parent’s lifetime was never taxed.
If the heir sells the property, however, the heir will face capital gains taxes on appreciation since 2007. If the heir holds the property until death, the property will once again get a tax basis step up to the market value at that point. The appreciation that happened during the heir’s lifetime won’t be taxed.
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