What Happens to Cost Basis if you Inherit a Seller Financed Note?

[Christopher Freeman]

I'm wondering what the tax implications are for the heirs of a seller who dies while carrying the note on a seller financed deal.

For example, suppose a seller has a fully depreciated asset with a $50k cost basis from the value of the land. They sell for $250k. In a cash or bank financed deal, they show a capital gain of $200k.

My understanding is that if the seller were to carry the note, they would be able to spread the capital gains tax.

My question is: What happens if the seller dies before the note has been fully repaid and the note passes to the seller's heirs? Do the heirs receive a stepped up basis in the asset with which the note is collateralized, or will they continue to pay the gain on behalf of the decedent?

[William Hochstedler]

@Ashish Acharya

What is the maximum equitable interest a buyer can gain while preserving the seller's heirs' ability to get a stepped up cost basis on death?  (Specifically addressing what triggers a "sale" or taxable event with Lease/Options or contracts for deed.)

This isn't really about buyer's or seller's perspective.  I'm talking to grandma.  I want to buy it and she wants to sell it.  We both want to structure it in the best way for her estate while giving me ultimate ownership at a price we agree on today.  If the only way to take advantage of the stepped-up basis is to wait to get fee simple title until her death, I can wait.  But how would you structure that scenario?

If Grandma has a 20%+ capital gains liability she wants more money from me for the taxman.  In other words, it's not buyer against seller, it's buyer and seller against taxman.