Step-up in Basis – we’ve all heard this term but I suspect people are missing out on an opportunity when someone who has an ownership stake in a building dies and his/her interests passes to the rightful heir or spouse in many cases.
I’ve mentioned before that if an owner dies and if there is still decent depreciable basis remaining in the buildings he/she owns, the CPA or tax attorney or executor hopefully are aware enough to inquire about getting a cost segregation study done on that buildings or buildings before the estate files the final tax return. This is a sweet deal for the heirs and might put an extra $10k, $50k, $100k in their pockets instead of going to the IRS.
But what about when a married couple owns investment property or commercial property together and one of them dies. Let’s look at an example. (And with all of this, I’m not a CPA nor an attorney… if you find yourself in this situation, you will need to seek your own tax and legal advice. Some states may have different rules as to how this is applied).
Couple purchased a commercial building 20 years ago for $1,000,000. One of the spouses dies. An appraisal is done and it’s worth is now $3,000,000. The surviving spouse gets a step-up in basis. In this case they get 50% of the appreciated value and the initial purchase price. So the step-up is $1,500,000. Because they have owned this property for 20 years, they had depreciated it already by 50% and it’s likely quite profitable at this point. The surviving spouse can do a cost segregation study on that new step-up in basis and likely save a significant amount on their taxes. Just for simple math, let’s say 20% of it can be accelerated…that’s $300,000 depreciation deduction that they could take based upon studying the step-up.
If you live in one of the community property states, I understand that it might be that once one spouse dies, all of their property gets a step up in basis – check with your tax advisor on that one.
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