Does inheritance count for 1031 Exchange?

Question

A friend inherited his grandmother's property through his mother's estate. He'd like to sell in the Spring and is asking about a 1031.

I think since it is inherited, the cost basis is reset to today's value, and he can sell and pay no cap gains taxes, which is better than 1031. But I've long since learned that I don't know enough about 1031 Exchanges to give solid advice.

Michael Lynch · Answer

@Mindy Jensen Ordinarily, there should be a step-up in basis. But, watch the paperwork!

The property is eligible for a step-up if it did, in fact, go through the estate. In this context, to go "through the estate" for a full step-up, the property had to be held by your client's mother outright (or possibly in a revocable trust).

When an heir is referring to the property as their "grandmother's" when they inherited if from their mother's estate, it is worth checking the ownership carefully. Make sure, for example, that the grandmother did not leave it to your client with your client's mother having only a life estate, or that the property was not gifted to the client rather than inherited.

(I had a client come in the other day whose grandparents gifted their home to their daughter/client's mother, who in turn gifted the property to my client. Her basis goes all the way back to what the grandparents originally paid for the home!)

If the mother was married, make sure there is not a former spouse that left their interest (if any) to a bypass trust, etc.

How to be sure? One way it to look at the property's chain of title--any gift deeds or deeds that transfer ownership to a trust?

Consider advising your client to contact a CPA or attorney that works in this area.

Dave Foster · Answer

@Mindy Jensen, Yep there is a step up in basis. Of course that doesn't mean that there hasn't been appreciation significant since the estate was settled. But probably he can sell with no or little tax consequence. He just needs to take the probate settlement to his accountant to verify his basis right now and compare that to a possible sale price.

If there's gain then a 1031 could defer it.

John Nannini · Answer

Great input!

Kenneth Blacow · Answer

also, he needs to take a step up in basis election on the estate tax return. Tell him to be sure and speak with an accountant. I inherited some high value assets and stepped them up it also allows the ability to start to take depreciation on the stepped up basis.

Mark Jones · Answer

Make sure it has gone through probate and tax return filed

Wayne Brooks · Answer

Correct, the basis is stepped up to current value at the Time of inheritance.  If inherited within the last year or so, no or very little tax.

Melissa Gittens · Answer

Interesting discussion.. I would love to learn more.. following..

Does inheritance count for 1031 Exchange?

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