It’s that time of year again! The new year is here, and everyone is thinking…
There is a lot of confusion regarding what happens when inherited assets are sold. Let’s clear up the confusion as to the tax treatment of inherited assets by way of an example.
An Example of How Inherited Assets are Taxed in NY
Sheila owns her house worth $500,000, a brokerage account worth $300,000, and an IRA worth 200,000 for a total estate of $1,000,000. She has one daughter named Cindy.
The first question is: Is there an estate tax to be paid on the inherited assets?
The good news is that the answer is NO.
Estates under $5,850,000 in NY are not subject to estate tax and the federal exemption is $11,580,000.
The second question is: Now, what happens if Cindy sells the house?
Her mother paid $200,000 for the house which is now worth $500,000. Here the basis in the house steps up to the date of death value and hence if the house is sold for $500,000, there are no capital gains taxes.
The third question: What about the brokerage account?
It’s the same situation. If it was worth $300,000 but the cost basis was $100,000 – there would be a step-up in basis to $300,000 and if later sold for $400,000 – capital gains taxes would only be $100,000.
Lastly, any money coming out of a traditional IRA is subject to income tax.
So, the step-up in basis can save capital gains taxes – a good thing.
As always, we are here to help. Should you have any questions, please do not hesitate to reach out to us.