Asset Cost Basis with Probate in Texas
The amount of money an owner paid to acquire a given asset is called its “cost basis.” Typically, taxes are due on the difference between the sale proceeds and the cost basis when an asset is sold.
Step-Up in Basis
Most assets enjoy a “step-up” in cost basis when the owner dies, meaning that the heir receiving the asset will be able to report a cost basis equal to its value on the date of the owner’s death, not what it originally cost the decedent.
For example, if Betsy inherited stock valued at $10,000 on the date of the owner’s death, she will only owe taxes on any gains above that amount when she sells it, even if the previous owner only paid $5,000 for it.
The step-up in basis also works in reverse. Heirs can take credit for losses on assets sold for less than their value on the owner’s date of death.
Tax-deferred accounts, like standard IRAs and 401Ks, enabled the original owner to contribute “pre-tax dollars” during their lifetime, which then grew tax-deferred. When this money is withdrawn, it is taxed as income, effectively having a cost basis of $0.
However, if the original owner contributed after-tax money to a standard IRA (non-Roth), part of the withdrawal can be considered as cost basis, effectively lowering the amount of tax due.
No taxes by heirs are due on withdrawals from Roth IRAS, as long as the heir follows all of the IRS’ rules and the decedent owned the Roth IRA for at least five years.
An annuity is a financial product that pays out a fixed amount of income every month or year. Unfortunately, annuities don’t qualify for the step-up in cost basis like most other assets.
A “qualified annuity” is funded with pre-tax dollars. Every dollar it pays out is considered income, meaning it has a $0 cost basis.
A “non-qualified annuity” is funded with after-tax dollars; its cost basis is the amount that was deposited into the annuity.
While annuity cost basis is straightforward, the timing of tax obligations can be more complex if the payout from a "Non-Qualified Annuity" is not taken in a lump sum but is instead taken in multiple payouts over time. If the estate or the heir receives periodic (e.g., monthly) payouts, only the percentage of each payment that comes from earnings is usually taxable.
If the annuity’s payouts are non-periodic, the IRS typically treats each payout as taxable earnings until all earnings have been distributed. After that, payouts are treated as a return of the purchase amount and are therefore not taxable.
The cost basis of cash is the cash itself since you technically can’t have a gain or loss on cash.
Cash held in a “deposit account” like a bank savings account is treated the same as most assets: the cost basis is the account value at the time of death. Any subsequent interest earned is potentially subject to being taxed.
Foreign currency should not be considered the same as cash. Any realized gains or losses due to exchange rate fluctuations must generally be reported as income. Seek the advice of a tax professional if your estate includes sizable amounts of foreign currency.
Assets Purchased by the Estate
If an estate purchases an asset during the settlement process, the asset's purchase price is its cost basis.
Additionally, as executor, if you sell an asset for the estate, you’ll need to report any gains or losses (compared to the cost basis) on the estate’s tax returns.
Provide heirs with any information you have on an asset’s cost basis, but remember that it’s their responsibility to assign the proper cost basis of an asset when they eventually sell it.
If you’re the executor of an estate worth millions of dollars and that estate will owe federal estate taxes, you have an option to establish an Alternate Valuation Date for the assets. A professional tax advisor can assist you with this.
Questions Concerning Probate and Real Estate?
Certain aspects of settling an estate, like handling an estate’s real estate holdings, may be outside your area of expertise or comfort zone. If in doubt, work with a professional.
If you have questions concerning probate and real estate in Tarrant, Parker, Wise, Collin, Denton, or Dallas County, contact David Pannell and Cities Real Estate. David has extensive experience helping families with their real estate needs before, during, and after the probate process.
David has been an agent/realtor since 2005. He has served as a United States Marines, City of Arlington police officer, and is a dedicated family man. You can trust him to put your interests first in any and all situations.
Call David today at (817) 797-9047 for help with your real estate and probate needs. You will be treated respectfully, and your requirements will be met efficiently and confidentially.
NTREIS data last updated December 2, 2023.