What Taxes Do the Decedent's Estate Owe on Capital Gains?
The estate tax is in place to allow for a deceased person's assets to be taxed in some situations. According to the IRS, the "laws on Estate and Gift Taxes are considered to be some of the most complicated in the Internal Revenue Code." Curiously, a law passed in 2001 may end up causing headaches for those paying estate tax on money--"capital gains"--made by a deceased person's property.
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Basic IRS provisions
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According to MoneyZine, you owe capital gains tax on "any type of property you sell for more than paid for it." The original IRS publication on estate tax includes only one mention of capital gains. Specifically, "the sale of [a deceased person's] property is usually considered the sale of a capital asset and may be subject to capital gains (or loss) treatment."
If you're an estate beneficiary, you didn't technically pay anything for the assets now in your possession. Theoretically, you sell any asset for more than you paid by default. In reality, however, the amount of capital gains tax is determined using profits made above and beyond the property's appraised value when the person died.
2001 Law
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In 2001, Congress passed an act with a curious provision: You don't have to pay estate tax if you're the beneficiary of someone who died in 2010--or, more accurately, it repealed estate tax for the year 2010. Obviously, if you don't owe estate tax, then you can't be made to pay taxes on capital gains made from an estate. Pending any further legislation, the old law will be reinstated in 2011.
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Implications
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While the precedent established by the 2001 law sounds beneficial to those whose loved ones have died in 2010, its effect on those who are paying estate tax could be dire. As Scott Saunders of NuWire Investor explains, "Up to 70,000 heirs could face higher taxes in 2010 as the result of the temporary elimination of estate taxes." In other words, Congress' temporary repeal of the estate tax didn't eliminate the need for the revenue that would otherwise be collected if it were in place. The money has to come from somewhere.
He continues by saying that "heirs of many smaller estates could face significantly higher income and capital gain tax costs."
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