One of the most common concerns I hear from families in Brandon, Fish Hawk, and throughout Florida is about the tax burden their loved ones might face after inheriting property or investments. “Will my children have to pay huge capital gains taxes on the family home?” “What happens to the taxes on my investment portfolio when I’m gone?” These are valid worries that deserve clear, honest answers.
As a Brandon estate planning attorney who has guided many families through inheritance planning, I want to help you understand how capital gains taxes work with inherited assets and more importantly, how proper planning can protect your loved ones from unnecessary tax burdens.
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.
But here’s where inheritance changes everything in a very favorable way for your beneficiaries.
The “Stepped-Up Basis” Rule: A Major Tax Advantage for Inherited Assets
When someone inherits property or investments, they receive what’s called 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.
How Does This Apply to Different Types of Assets?
Real Estate Properties: Your family home, rental properties, and vacation homes all qualify for stepped-up basis treatment. This can be particularly valuable in Florida’s robust real estate market, where property values have appreciated significantly over the years.
Investment Accounts and Stocks: Stocks, mutual funds, and other investment accounts also receive stepped-up basis treatment. If you’ve held investments for many years that have grown substantially, your beneficiaries can inherit them without the capital gains tax burden you would have faced.
Business Interests: Family businesses and business partnership interests also benefit from stepped-up basis rules, which can be crucial for family business succession planning.
What Assets Don’t Get Stepped-Up Basis Treatment?
It’s important to understand that not all inherited assets receive this favorable treatment:
Retirement Accounts: IRAs, 401(k)s, and other retirement accounts don’t get stepped-up basis because they contain pre-tax dollars. Your beneficiaries will still owe income tax on distributions from these accounts, though they may have options for spreading out those tax payments.
Savings Bonds: 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?
Here’s some good news for Florida residents: 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.
Planning Ahead for Your Family’s Tax Efficiency
Understanding how capital gains taxes work with inherited assets should give you confidence that your careful lifetime planning and asset building will truly benefit your family. The tax laws generally favor inheritance over lifetime gifts when it comes to appreciated assets, which means your loved ones are likely in a better position than you might have realized.
If you have additional questions or you’d like to explore additional strategies to structure your estate plan for maximum tax efficiency, we invite you to contact our team at the Law Offices of Laurie E. Ohall at (813) 438-8503 to schedule a consultation. We help families throughout Brandon, Riverview, Fish Hawk, and Lithia create tax-smart estate plans that protect both their assets and their loved ones’ financial futures.