When a taxpayer receives inherited property, what principle governs the basis for that property?

When a taxpayer receives inherited property, the basis of that property is determined by its fair market value at the time of the decedent's death. This principle is known as the "step-up in basis," which allows the heir to use the fair market value as their starting point for calculating any future gains or losses should they sell the property.

This approach benefits heirs because it often minimizes capital gains tax that would be owed if the property is sold. For instance, if the decedent purchased a property for much less than its current value, the heir can base their gain calculations on this higher fair market value rather than the lower original purchase price. This principle significantly impacts the taxation of the heir when they ultimately sell the property.

The other options provided do not apply to inherited property. An adjusted basis typically refers to basis after considering improvements and deductions but is not the starting point for inherited property. Similarly, cost basis pertains to what was originally paid for the property by the original owner, which is not relevant in this context. Lastly, the original owner's basis is a consideration in regular transfers of property but does not apply to inheritance, where the fair market value at death is utilized instead. This established rule underscores the importance of assessing inherited property based on its current