In 2009 there was a step up in basis.  In 2010 there is no step up in basis.  What does this mean?  The basis of the property received in 2009 was equal to the value of the property on the date of death.  The best way to illustrate this is with an example.

Example:  Decedent purchased his home for $100,000.  On the date of his death the home was valued at $150,000.  If the death was in 2009, and the recipient sells this property for $160,000 the recipient’s capital gains would be the difference between $150,000 (the date of death value) and $160,000 (what it sold for)…$10,000.

In 2010, since there is no step up in basis, the capital gains would be the difference between $100,000 (the cost to the decedent) and $160,000 (what it was sold for)…$50,000.

What may save on this capital gains is that in 2010 individuals have a $1.3 million exemption.  If the asset passes to a spouse there is an additional $3 million exemption.  This means that the $1 million (or $1 million plus $3 million exemption) can be used to step up the basis of any property. This could ultimately avoid or minimize capital gains tax.

If congress does not act on this in 2010, we will revert to the 2002 exclusion per person in the amount of $1 million and the step up in basis returns due to the sunset provision in the 2001 Tax Reconcilliation Act.