A loved one passes away, what happens tax-wise? Good question, especially if you’re the one responsible for dealing with tax matters and especially if major bucks are in play. This column addresses some of the most important tax-related considerations. You can read Part 1 here.
• If the decedent was married and co-owned one or more homes and/or other capital-gain assets with the surviving spouse, the tax basis of the fraction that was owned by the decedent is stepped up to FMV as of the applicable magic date. Warning No. 2: More potential bad news for heirs who inherit appreciated assets: the proposed Biden tax plan would also retroactively increase the maximum federal rate on net long-term capital gains, after any allowable basis step-up, to 39.6% for gains recognized after some magic date this year. After tacking on the 3.8% net investment income tax , the proposed maximum effective rate would be 43.4% compared to the current maximum effective rate of “only” 31.8% .
This is a taxpayer-friendly rule, but pay attention to the deadline. Since the two-year period begins on the date of the decedent’s death, a sale that occurs in the second calendar year following the year of death but more than 24 months after the date of death will not qualify for the larger $500,000 gain exclusion.
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