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Home >> Estate Planning Articles >> A Quick Guide for Basis

A Quick Guide for Basis

April 30, 2012 by Robert Kulas.

Compliments of Our Law Firm,
By: The American Academy of Estate Planning Attorneys

The word basis can have a lot of different meanings. When we’re talking about taxes, though, it has one very specific definition. Basis is the yardstick used by the Internal Revenue Service to determine how much tax you pay on an asset when you sell or otherwise dispose of it. Sell property for more than your basis, and you have a gain that might result in a tax bill. Sell property for less than your basis, and you may be able to claim a tax loss.

To determine your basis in an asset, you have to go back to the point at which you first acquired it. If you bought the property, your basis is the amount you paid for it. Your basis can increase if you make certain qualifying improvements to the property, or it can decrease along with tax depreciation of the property.

Property you receive as a gift comes to you with the donor’s basis. Imagine your Uncle Joe gives you the beach cottage he bought for $20,000 back in 1974. If you decide to sell the property, you’ll pay tax on the amount by which your selling price exceeds the amount Uncle Joe originally paid for it (plus certain amounts spent on improvements).

Inherited property is subject to special rules. It gets what is called a step-up in basis. Imagine you inherit Uncle Joe’s beach cottage after his death rather than receiving it as a gift during his lifetime. In this situation, your basis in the property is not the amount your uncle originally paid for it. Instead, your basis is normally the value of the property at the date of Uncle Joe’s death. So, if the property is worth $200,000 when Uncle Joe passes away, this is your basis, rather than the $20,000 he originally paid for it.

An understanding of basis can help you decide which assets to gift during your lifetime, and which to wait and distribute using your Will or Trust. It makes sense to gift property with a basis that is close to its fair market value. This minimizes the recipient’s potential tax bill should he or she decide to sell the asset.

On the other hand, you might want to hold on to property that has a basis much smaller than its fair market value. Transferring this property after you are gone means closing the gap between basis and fair market value, and could result in significant tax savings to the recipient.

An experienced estate planning attorney can help you evaluate the potential tax issues facing you and your beneficiaries and structure a plan that best accomplishes your goals.

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Robert Kulas and staff made making a will an easy to understand process. They were very knowledgeable and attentive to my wishes. All my documents were provided in an organized binder which will be a great asset to my family. I would definitely recommend them.

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I have worked with Mr. Kulas & staff before. And they are very professional. I am very satisfied with Mr. Kulas and his staff and give them the highest satisfaction and 5 star rating.

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I have known Robert Kulas for 20 years since I was co-executor for friends who had Mr. Kulas prepare a Trust for them. When I felt I needed a trust also, I came to him. I have always been completed satisfied with his work and that of his charming, competent staff.

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We began our estate plan process in 2004 (12 years ago) and have been pleased with the periodic reviews we have gone through and when changes have been needed the firm has been thorough and professional in making those changes.

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