By Laurie E. Ohall, Florida Board-certified Elder Law Attorney
One of the most common questions I hear from families is whether their loved ones will have a tax burden after inheriting property or investments. These are valid worries that deserve clear, honest answers. Here are some common questions and how to properly plan.
What Are Capital Gains Taxes and How Do They Normally Work?
Capital gains taxes are what you pay when you sell an asset for more than you originally paid for it. For example, if you bought stock for $10,000 and sold it for $25,000, you’d typically owe capital gains tax on that $15,000 profit. The same principle applies to real estate, investments and other valuable assets.
With an inheritance, capital gains tax is usually not an issue because when someone inherits property or investments, they receive a ‘stepped-up basis.’ This means the inherited assets are valued at their fair market value on the date of your death, not at what you originally paid for them. This rule can provide enormous tax savings for your loved ones. This applies to real estate (family home, rental properties, etc.), stocks, mutual funds and other investment accounts. This also applies to family businesses and business partnership interests.
What Assets Don’t Get Stepped-up Basis Treatment?
It’s important to understand that not all inherited assets receive this favorable treatment. For example, IRAs, 401(k)s and other retirement accounts don’t get stepped-up basis because they contain pretax dollars. Your beneficiaries will still owe income tax on distributions from these accounts, though they may have options for spreading out those tax payments. Additionally, U.S. savings bonds don’t receive stepped-up basis treatment, and beneficiaries may owe tax on accrued but unreported interest.
Does Florida Have State Capital Gains Taxes?
Florida has no state capital gains tax and no state estate tax. This means your beneficiaries only need to consider federal tax implications, which can significantly reduce their overall tax burden compared to beneficiaries in other states.
It is good to know that, if you’ve held investments for many years that have grown substantially, your beneficiaries, in most instances, will inherit them without the capital gains tax burden you would have faced.
