Does Federal Step Up Basis Depend on State of Residence?

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chambers136
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Does Federal Step Up Basis Depend on State of Residence?

Post by chambers136 » Thu Sep 13, 2018 7:47 pm

I understand if you live in a community property state, one spouse gets a full step up on the basis of a joint account upon the death of the other spouse, and non-community property states get a 1/2 step up. Does this apply to both state and federal basis reported to the IRS? It seems odd that the state would determine the federal basis, but it also seems odd to have a different basis for state and federal.

bsteiner
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Re: Does Federal Step Up Basis Depend on State of Residence?

Post by bsteiner » Thu Sep 13, 2018 9:48 pm

Before 1982 the marital deduction was generally limited to 50% of the estate. Congress assumed that husbands earned money and had assets and wives didn't, and husbands died first. If the husband had the assets and died, his estate would get a basis step-up for all the assets, and a marital deduction for 50% of the assets.

To put couples in community property states (where each spouse owned a 1/2 interest in the community property), when the husband died, the couple got a basis step-up for both halves of the community property, but no marital deduction. (There was no marital deduction for community property since the surviving spouse already owned a 50% interest in it.) As a result, the couple in a community property state ended up the same as the couple in a common law state).

The cost of basis step-up was estate tax. With the current level of the estate tax exclusion amount and the unlimited marital deduction, most people can get a basis step-up without incurring estate tax.

As to the question presented, state law determines property rights, and Federal law determines how they're taxed. As far as I know, every state follows the Federal basis rules (with some adjustments, such as different depreciation rules). There was some discussion as to whether, if someone died in 2010 and the estate elected carryover basis in lieu of estate tax, but incurred state estate tax, there would be a basis step-up for state income tax purposes. However, I'm not aware of any state that allowed a basis step-up for state income tax purposes in these cases.

chambers136
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Joined: Tue Feb 28, 2017 9:49 am

Re: Does Federal Step Up Basis Depend on State of Residence?

Post by chambers136 » Fri Sep 14, 2018 5:41 am

Thanks for the thorough explanation- I was not aware of the marital deduction.

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