For example, assume a decedent owns real estate originally purchased for $250,000 and worth $2,000,000 at the time of death. Without a stepped-up basis, heirs would face $1,750,000 in taxable gain if they were to sell the property. With a stepped-up basis, heirs receive the property with a basis of $2,000,000; therefore, only appreciation in value above $2,000,000 is taxed.
The step-up regime is replaced by a carryover basis regime with EGTRRA. Under the carryover basis regime, during 2010 (when the tax is eliminated), heirs will receive property with basis equal the decedent's basis prior to death. Under this system stepped-up basis adjustments will be allowed for up to $1.3 million per estate, and an additional $3 million for transfers to surviving spouses. The bottom line is that heirs and estates of wealthy individuals may be facing significant capital gains taxes for deaths in 2010, effectively trading in the estate tax for a capital gains tax.
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