In the latest Weekly Wright Report:
Stepped Up-Tax Basis – A Tax Law Home Run for Collectors and their Loved Ones
It is a common scenario – a loved one passes away with the family left to clean out their belongings from their home. In the process, the family realizes that their dearly departed has left behind collectibles or memorabilia of value. One could always hope what was left behind was something like the 1914 Baltimore News Babe Ruth Rookie card that recently sold for $7.2 million, but most are not so lucky. Regardless, there is often a rush to sell from family members without interest in belongings taking up space in their house versus the significant interest in dollar bills resting in their bank accounts.
Often a forgotten consideration when making such a sale of collectibles are taxes and a concept known as stepped up basis. Stepped up tax basis essentially resets the cost basis of an inherited asset from its purchase (or prior inheritance) price to the asset’s higher market value on the date of the owner’s death.
The concept can be more easily understood from the below scenario. Imagine your family member left behind a slight more realistic collectibles – a mint condition 1957 Topps Johnny Unitas rookie card, now worth $90,000. Your family member pulled the card out of a pack of football cards that cost 5 cents in 1957 and has stored the card in a shoebox ever since. The general rule of thumb is that sports card would likely be considered a collectible by the IRS so the tax rate would be 28% on any sale. You and your family begin to see the following equation and do not like how the math works out.
Present Day Value from sale = $90,000
Original Value/”Cost Basis” = $0
Profit from sale = $90,000
Tax due on gains from sale (28% of $90,000) = $25,200
$25,000 is a large tax bill and family members start to think twice about cashing out the card. However, you talk to an attorney and realize that because your family member has died, stepped up tax basis applies to the sale of the card. Your family member died in 2021 and the fair market value of the exact same card in the same condition sold for $85,000 in 2021. The new tax bill gets calculated as follows:
Present Day Value from sale = $90,000
Stepped up Cost basis = $85,000
Profit from sale after step up – $5,000
Tax due on gains from sale (28% of $5,000) = $1,400
Now that looks like more of a home run!
As you can see, a simple understanding of tax laws can go a long way in helping make these stressful decisions that often involve many family members. WCS’s attorneys are uniquely experienced to serve you in these sorts of scenarios– whether it be factual investigation and finding comparable sales, tax considerations, negotiation of the sale of collectibles, or estate planning. Please reach out to me at ehealy@wcslaw.com if you or a loved one find yourself in a similar situation. And if you are a collector at heart, you may enjoy this podcast episode where I took a deeper dive into stepped up tax basis as it relates to the sports card collecting hobby in 2021 with Dr. James Beckett on Sports Card Insights