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Considering Capital Gains During Estate Planning

When most people talk about “tax issues” during estate planning, they are usually referring to the federal estate tax. However, because that tax only applies to estates of more than $5.34 million, it is not an issue for the vast majority of people. In other states, they may also be referring to state-imposed inheritance or transfer taxes. These types of taxes do not exist in Florida but there is a third type of tax issue that Floridians should consider during estate planning: capital gains, specifically the capital gains their beneficiaries may have to pay.

Capital gains apply to the appreciation in value of assets. Every capital asset has a cost basis, typically the value of the asset at the time of acquisition. When the owner later sells the asset, he or she must often pay capital gains tax on the difference between the cost basis and sale proceeds. If an asset has appreciated significantly, the tax liability can be substantial.

The reason this is important in the estate planning context is because the way in which property is acquired can affect the cost basis attached to it:

  • When a person receives property as a gift, they take it subject to the donor's tax basis. For instance, if your grandmother purchased a house for $10,000 in 1946, signs that house over to you for no consideration and you sell it for $100,000 soon thereafter, you may have to pay capital gains tax on the $90,000 increase in value.
  • When a person receives property by inheritance, the tax basis is “stepped up” to the date of the previous owner's death. Therefore, if you inherited your grandmother's house instead of receiving it as a gift, your tax basis would no longer be the $10,000 she paid for it but the near $100,000 it was worth on the date of her death.

This is one of the frequently overlooked downsides to gifting. While gifting may still be a useful estate planning technique under some circumstances, it is wise to consider all the variables with the help of an experienced Florida estate attorney.

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