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Tax considerations when transferring assets

Quick facts

  • Transferring assets must be well thought out and implemented carefully because of the potential financial consequences. 
  • Work with an attorney to get information on your specific situation.

There are numerous tax related aspects to consider when transferring assets. Some tax aspects are related to your yearly income, whereas other tax implications impact your overall estate. First we discuss tax basis and then delve deeper into other tax related transfer issues.

Income tax basis

Basis is the amount of capital in a property at acquisition recognized for tax purposes. When selling an asset, you pay tax on the difference between the selling price and your adjusted basis (cost plus improvements minus depreciation) of the asset.

Example: If you sell land for $100,000 and your adjusted basis for the land is $20,000, your taxable gain is $80,000.

The adjusted basis is determined by how you acquired the asset.

If you purchased the asset

Generally, your basis is what you paid for the asset, plus improvements, minus any depreciation you've claimed on the asset.

Examples: 1) If you purchase a tractor for $120,000 and depreciated it for three years claiming a total of $42,850 depreciation, your adjusted basis would be $77,150 (assuming no improvements).

2) If you purchased land and have claimed no depreciation on it, your basis is what you paid for it, plus any improvements (tiling, etc.).

If you inherited an asset

Your basis is the fair market value (FMV) or special use value assigned the asset as it passed through the estate to you.

Example: You inherited some land from your mother. Her adjusted basis was $70,000. Upon her death, the land received a step up in basis and is valued in her estate at $160,000. Your adjusted or cost basis is $160,000.

If you received an asset as a gift

Generally, your basis is the same as the adjusted basis of the donor.

Example: You received a gift of farmland valued at $160,000 with a basis (purchase price) to the donor of $25,000. Your basis is then $25,000.

Asset basis is extremely important to the property holder since it determines the amount of tax that will be paid upon the sale of the asset.

Assets that pass through an estate receive a "stepped up" basis. The "stepped up" basis is usually the fair market value on the deceased individual's date of death. This provides a strong incentive to hold low basis property until death to achieve the stepped up valuation for heirs.

Example: Sally Smith sold 160 acres of farmland for $4,200/acre or $672,000. It had an adjusted basis of $100,000. Her taxable gain whether sold for cash or by installment method would be $572,000. Because of the sale, she or her heirs must pay tax on the $572,000 gain. However, if Sally had retained the property until her death, the estate would assign a stepped up basis to FMV of $672,000. The heirs could later sell the property for that amount and pay no tax.

Other tax situations and considerations


Note: With changes in federal governmental elected officials these laws can change quickly. Make sure you check with your attorney and accountant for up to date information or information specific to your situation!

Caution: This publication is offered as educational information. It does not offer legal advice. If you have questions on this information, contact an attorney.

Gary Hachfeld, former Extension educator; David Bau, Extension educator; Megan Roberts, Extension educator and C. Robert Holcomb, Extension educator

Reviewed in 2018

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