When investment property is inherited, the capital gain or loss on any later disposition of that property is treated as a long-term capital gain or loss.
The gain or loss on a sale or trade of property is found by comparing the amount realized with the asset’s adjusted basis. The basis of property that is received as inherited property is generally one of the following:
- The fair market value (FMV) of the property at the date of the individual’s death
- If a federal estate tax return does not have to be filed, the taxpayer’s basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.
- The FMV on the alternate valuation date
- The deceased’s adjusted basis in land excluding a qualified conservation easement
Typically, once the amount of the gain or loss is determined, the taxpayer must decide whether it is long-term or short-term.
- If the taxpayer holds the investment property for more than one year, any capital gain or loss is a long-term capital gain or loss.
- If the taxpayer holds the property for one year or less, any capital gain or loss is a short-term capital gain or loss.
When investment property is inherited, the capital gain or loss on any later disposition of that property is treated as a long-term capital gain or loss. This is true regardless of how long the taxpayer actually held the property. (Publication 550, page 40).
If you are using a cost segregation firm that understands tax, they should be able to help you segregate the property before the decedent passes away and again after the beneficiary receives the property. The cost segregation firm should have a CPA on staff and specialize in tax, not just cost segregation, which is simply engineering calculations.
Kevin Jerry is a nationally recognized expert in Tax Method Changes. He specializes in Cost Segregation, Tangible Property Regulations, and revenue recognition changes. Kevin graduated cum laude from the University of Cincinnati with a Master of Science Degree in Real Estate Taxation. Over the last seven years, he has worked with Eric Wallace on the Tangible Property Regulations with some of the largest property owners in the country.