How is the basis of inherited property determined?

The basis of inherited property is determined by its fair market value on the date of the decedent's death. This method of determining basis is significant because it often allows heirs to receive a "step-up" in basis, which means the basis is adjusted to the value of the property at the date of death, potentially reducing capital gains tax if the property is later sold.

This approach is beneficial for heirs because if the inherited property has appreciated significantly since the original owner purchased it, they will not be taxed on the appreciation that occurred during the decedent's lifetime. Thus, the fair market value at the date of death is a critical factor in establishing the basis for inherited property, aligning with tax regulations concerning capital gains and inheritance.