What is the step-up basis on inherited home?

Attorney Chris Merrill: I have inherited my parents' home three years ago and have lived in the home ever since. If I sell it, will I sell it for more and if I sell it for more than $250,000, how does the value of that when I've inherited get figured? In other words, they're saying, it was worth one value when the parents passed away, but now because they've lived in it, it's accrued value and now they want to sell it but it would have based on the time that they passed away.

Attorney Tom Olsen: The Internal Revenue Code has a good provision leftover in it called the Step-up Basis. The Step-up Basis says that when he inherited this home a few years ago from his parents, at that moment in time when he inherited it, if the home at that moment in time was worth $250,000 and now three years later is worth $275,000, he's going to pay capital gains on his $25,000 profit. His basis for capital gains purposes is the value at the moment that he inherited.

Attorney Chris Merrill: If the children intend to stay, or one of them intends to move into the house or they intend to keep it, that would be a reason that they may want to have an appraisal done at the time the parents pass away. Most of the time, children are selling it right away and that's when the value is what it is and that's when the capital gains is going to be zero-

Attorney Tom Olsen: Right.

Attorney Chris Merrill: -but it's just that this is a good point where this is a child that inherited parents' house and oftentimes, we're sharing this information with the parents?

Attorney Tom Olsen: Yes. If mom has passed away and you've inherited a home and your intention is to sell that home in six to nine months, you don't need an appraisal. We can assume that what you sell it for is what it was worth on the day that mom passed away. If your intention is to live in that home for a few years, then yes, you would want to get an appraisal done so you could prove to the IRS what it was worth when mom passed away. This is called the Step-up Basis.

Once again, no guarantee it's always going to be there. I read the paper every once in a while, the Congress thinks about getting rid of the Step-up Basis. It's there, it's a good thing and hopefully will continue to be around.