Estate Planning

The Texas Transfer on Death Deed

Does Property Passed by Transfer on Death Deed Receive a Step-Up in Basis?

by Rania Combs

When someone receives a gift, the recipient of the gift is not responsible for reporting the value of any gifts as income. Rather, it is the gift-giver, or donor of the property, who is required to pay gift taxes if the value of the gift exceeds the annual gift tax exclusion.

Taxes become an issue for the gift’s recipient when gifted property is sold. The gift’s recipient is deemed to have owned the property for as long as the donor owned it, and also takes the donor’s cost basis (the original value of the property). This is true for gifts made while the donor is alive.

For example, suppose your mother purchased a home for $50,000 fifty years ago, and the property is now worth $150,000. If she gives the property to you as a gift during her lifetime, you take her cost basis of $50,000. When you sell the property, you will have a long term capital gains of $100,000 ($150,000 minus $50,000).

Different rules apply to inherited property. When the transfer is deemed to have occurred at the donor’s death, the recipient of the property receives a step-up in basis to the value of the property on the date of death. This can result in significant tax savings when the property is sold.

Taking the example above, suppose that instead of giving you the property during her life, your mother holds on to the property, which passes to you when your mother dies. In this situation, your cost basis would be the value of the property on the date of your mother’s death. If you sell the property right away, you will not have have to pay any capital gains taxes.

Property that is transferred by transfer on death deed in Texas occurs at the donor’s death. Therefore, the beneficiary of such property should get a step-up in basis on the property just as if it had passed through probate. The benefit of having a transfer on death deed is that the property would pass by operation of law, bypassing the costs and time associated with a probate proceeding.


Your email address will not be published. Required fields are marked *

Comments

  1. Top 10 from Texas Bar Today: Exemption, Representation, and Taxation | Texas Bar Today

    August 26, 2016 at 12:19pm

    […] Does Property Passed by Transfer on Death Deed Receive a Step-Up in Basis? – Rania Combs @raniacombs of Rania Combs Law in […]

  2. Peter Guglielmo

    July 31, 2018 at 11:53am

    I suspect that a separate transfer on death deed should be filed for each real property, is this true ? Thanks

    1. Rania Combs

      August 10, 2018 at 6:13pm

      Yes.

  3. Lucy Bradley

    September 9, 2018 at 5:10pm

    Upon the donors death does the TOD deed transfer the original deed into the beneficiary name? Will the TOD deed allow the beneficiary to sell the property?

    1. Rania Combs

      September 10, 2018 at 10:18am

      The transfer on death deed would serve as a link in the chain of title to show the property has passed to the beneficiary.

    2. Norma Herrin

      June 19, 2019 at 8:15pm

      Does the TOD allow the beneficiary to sell the property? If so, is there a waiting period?

      1. Rania Combs

        July 18, 2019 at 11:50am

        The TODD will allow the beneficiary to sell the property; however, the transfer on death deed statute gives creditors a period of 2 years from the date of the grantor’s death to “claw back” a piece of property which has been transferred by a transfer on death deed. This means that if you die with outstanding debts, the property could be tied up for up to two years, until the period for creditors to make claims against the estate expires.

  4. Mark Mcvicker

    April 7, 2020 at 6:01pm

    If my children acquire my house via a deed of death, and sell it a year later, are they subject to capital gains

    1. Rania Combs

      April 7, 2020 at 6:07pm

      Inherited property receives a step-up in basis to the value on the date of death. Capital gains taxes would be due on any appreciation that occurs between the date of death and the date the property is sold.

Learn more about how we can help you.

Get Started