The Economic Growth and Tax Relief Reconciliation Act of 2001 and the Capital Gains Tax

Prior to December 31, 2009, the basis of inherited property (or property acquired by way of substitutes for testamentary transfers) was usually the fair market value of the property on the date of the decedent’s death (or, six months after the decedent’s death if the executor elects to value the assets included in the gross estate on the alternate valuation date of six months after the decedent’s death due to the aggregate value of the assets being less at that time). The decedent is not required to recognize gain on the transfer of property at death, so any appreciation that occurred during the decedent’s life is exempted from tax. This is what is referred to as a tax-free step-up in basis.

For many years prior to the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), tax reformers had been objecting to the tax-free step-up in basis, arguing that either the appreciation on property transferred at death be taxed, or that the survivors take the property with a carryover basis as under Title 26, Section 1015 of the United States Code, which covers the basis of property acquired by gifts and transfers in trust, and generally provides that the basis would be the same as it would be in the hands of the donor.

With the passage of EGTRRA came carryover basis provisions. Title V, Subtitle E, Section 541 of EGTRRA terminates the step-up in basis at death for decedents dying after December 31, 2009. There are, however, some major credits and exemptions that will prevent a number of people from being affected by the provisions. The assets of every decedent’s estate will be eligible for a $1,300,000 increase in basis, and assets passing to the surviving spouse of a decedent will be eligible for an additional $3,000,000 increase in basis. H.R.4154. - Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009, recently passed by the House of Representatives, would repeal the carryover provisions of EGTRRA. Although beneficiaries won’t be paying any federal estate taxes in 2010, some may be paying capital gains taxes instead.

Economic Growth and Tax Relief Reconciliation Act of 2001

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