Do You Have to File a 706 Form to Get a Step Up in Basis?

Inheriting property can trigger tax questions. After all, there can be taxes for the estate and the beneficiaries. But there is a lot that determines where taxes will come from on inherited property.

Luckily, beneficiaries will usually receive a step up in basis, which means the property will be inherited at the current market value. But is this automatic, or do beneficiaries need to file any forms?

What is Form 706?

IRS Form 706 is titled United States Estate (and Generation-Skipping Transfer)

Tax Return. This form is used to claim any unused estate exclusion from a deceased spouse.

In 2023, estate taxes do not need to be paid if the estate is not worth more than $12.92MM for single filers and 25.840MM for those who are married. This is at the federal level and is called the federal estate exemption. It is a lifetime exemption, which means once it is used up, it can be used again.

Inheriting property can trigger tax questions. After all, there can be taxes for the estate and the beneficiaries. But there is a lot that determines where taxes will come from on inherited property.

Luckily, beneficiaries will usually receive a step up in basis, which means the property will be inherited at the current market value. But is this automatic, or do beneficiaries need to file any forms?

What is Form 706?

IRS Form 706 is titled United States Estate (and Generation-Skipping Transfer)

Tax Return. This form is used to claim any unused estate exclusion from a deceased spouse.

In 2023, estate taxes do not need to be paid if the estate is not worth more than $12.92MM for single filers and 25.840MM for those who are married. This is at the federal level and is called the federal estate exemption. It is a lifetime exemption, which means once it is used up, it can be used again.

Form 706 comes into play when a spouse passes without using any of their estate exemption. Here’s how it works. Let’s say the husband passes, and half of their estate is worth $10MM. This is less than the $12.92MM exemption. Upon the husband’s passing, the wife will own 100% of the estate worth $20MM.

The wife then passes. Because the wife is no longer married, her exemption is $12.92MM. This leaves $7.08MM of the estate taxable at 40%. 

However, the wife made a portability election on Form 706, porting over the husband’s unused exclusion. The wife’s new exclusion is $25.840MM, exempting the entire $20MM estate from federal estate taxes.

Filing Form 706

Form 706 is a complex form with many options. Portability is found in Part 6 of the form, but portability questions can be found throughout the form.

Given the length and complexity of Form 706, working with an experienced estate attorney can help ensure the correct options are chosen.

Is Form 706 Required for a Step Up in Basis?

Form 706 is not required to receive a step up in basis on inherited property. A step up in basis is automatic at the time of inheritance. 

Even if the property isn’t sold, taxes may still be owed. Six states currently have inheritance taxes. So, if you live in one of those states, you may have to pay an inheritance tax.

Note that if inherited property is sold for a gain, capital gains taxes will be owed. Although capital gains taxes on inherited property will be much smaller than non-inherited property due to the step up in basis vs. the original basis.

To summarize, Form 706 isn’t required to receive a step up in basis on inherited property. Given how complex Form 706 is, it’s best to seek out the advice of a tax specialist when filling out this form.