Tax Basis Relates to Estate Planning in Kansas
April 3, 2018
Kansas Estate Planning Attorney Explains how Tax Basis Relates to Estate Planning
You have likely heard the term “basis” as it relates to income taxes. While it is true that tax basis is a concept most commonly used in dealing with matters of income taxation, it is also true that basis plays a role in estate planning. Basis is a concept that gets used to determine the amount of tax that gets paid on an asset. When a person owns an asset, its tax basis might not remain fixed throughout that person’s ownership – it might fluctuate. Events that can trigger a change in the tax basis of an asset include the date the owner purchased it, what type of asset it is, and its value at the time that the owner either sells it or dies.
Income tax gets calculated and paid on assets when they get sold. If the asset’s value went up during the time that the owner owned it and the owner sold it for more than they paid for it, they would pay a tax on the capital gain that they realized upon the sale of the asset. Capital gains get taxed differently than income earned in other ways.
The basis of real property and other depreciable assets changes when the owners of those assets elect to depreciate them on their tax returns. The continual decrease in the tax basis of those assets can lead to a higher tax when the assets get sold. At the time of the sale, capital gains tax gets calculated on the difference between the depreciated value and the sale price, instead of on the difference between the purchase price and the sale price.
The most pertinent thing about tax basis concerning estate planning is that the tax basis of an asset automatically gets “stepped up” upon the death of the asset’s owner. For example, a piece of real property that got purchased for $250,000 and depreciated $63,000 by its owner during their lifetime gets revalued at the date of the owner’s death, and that updated value gets included in the owner’s taxable estate for estate tax purposes. That’s where the estate tax exemption comes in and relieves the estate of paying tax if its taxable value does not exceed the exemption amount.
In addition to getting used to calculate estate tax, basis gets applied to beneficiaries of an estate. The asset’s basis gets stepped up to its value at the owner’s date of death, so the property’s subsequent sale is unlikely to result in a capital gain. This gives property owners something to think about when they do their estate planning, whether to hold properties until they die or sell or retitle them beforehand. A Kansas estate planning attorney can help you understand the tax implications of the various options that you have for all of your assets and can help you create an estate plan that will accomplish your estate planning goals.
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If you have estate planning questions, call Wichita estate planning attorney J. Joseph Weber today.