How “modified carryover basis regime” affects property

The new modified carryover basis regime is something that property beneficiaries need to be aware of. In the past, beneficiaries of property received a “step-up in basis” of the property that they inherited. This is no longer the case. Instead, beneficiaries are still allowed to inherit property but will do so under the “modified carryover basis regime.” Before you can understand how modified carryover basis regime affects property tax, you must first understand what the “basis” entails.

For property tax purposes, the basis of a piece of property is the amount paid for the property in addition to the value of improvements. As you can imagine, the property tax basis for real estate is calculated differently than for stocks and bonds as potential improvements could have been made. Before the modified carryover basis regime took over, there was a step up in basis. This means that regardless of what the deceased paid for the property, the beneficiary inherited it at fair market value. For instance, if the deceased paid $200,000 for a home and did not make any improvement and the fair market value increased to $300,000, the beneficiary inherited the property with a tax basis of $300,000. So what is the modified carryover basis regime? For those who die on or after January 1, 2010, the beneficiary will inherit the lesser of the original tax basis plus improvements or the fair market value at the time of death.

For example, if the deceased paid $5 million for their home and did not make any improvements and the fair market value was $7 million, the beneficiary will inherit the home with a carryover tax basis of $5 million. But what if the market value decreased to $4 million, for instance? In this case, the beneficiary’s basis in the property is only $4 million, as it is the lesser of the two.

Now that you know more about modified carryover basis regime it is easier to understand the property tax implications that it has on those receiving property upon another’s death. It is important to note the differences between the modified carryover basis regime, and the past “step-up in basis” system. All in all, the new modified carryover basis regime affects how much property tax you pay on inherited real estate as well as how this number is calculated.

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