For example, if you have a house worth $20 million and you bought it for $2 million, the potential tax impact on your heirs would generally depend on the estate tax exemption and the capital gains tax basis at the time of your death.
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Estate Tax: The federal estate tax applies to the value of your entire estate, including the house. If your total estate is below the $13.9 million exemption limit (for 2024), your heirs won't have to pay federal estate taxes. If the estate exceeds this limit, the amount above the exemption would be subject to estate tax. For an estate valued at $20 million, if the exemption limit is $13.9 million, your heirs would be liable for estate tax on the $6.1 million excess. The tax rate on this amount is up to 40%, depending on the specifics of the estate.
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Capital Gains Tax: When heirs inherit a property, the property's basis is typically "stepped up" to its fair market value at the time of death. This means that if your heirs sell the house for its current value of $20 million, they generally won't have to pay capital gains tax on the appreciation from $2 million to $20 million. The gain is not taxable if they sell it for the stepped-up basis amount of $20 million.
In summary:
- Estate Tax: If the estate exceeds the exemption amount, your heirs may owe estate taxes on the excess.
- Capital Gains Tax: Generally, your heirs will not owe capital gains tax on the increase in value since the basis is stepped up to the market value at your death.
