What should you do?

First, if you inherit an estate in 2010 you get it free of estate tax. However, it’s likely the estate tax will return in 2011. Unless Congress steps in, estates more than $1 million will be taxable.

Perhaps the biggest change applies to the cost basis of property you inherit, including a home:

  • Before 2010, the cost basis was “stepped up” to the market value on the date of death. That is, if you sold your parents’ old house in 2009 immediately after inheriting it, you didn’t pay capital gains taxes on the difference between the sale price and what your parents paid for it some 30 years ago. That is, selling the house was a tax-free transaction.
  • In 2010, however, property has carry-over basis. For property inherited in this year only, you will pay tax on the price difference. But there’s some relief: Executors can add a limited amount of basis to inherited property to save on taxes—the formula can be complex and you should consult a CPA or attorney.

However, these adjustments may not be enough to save you from taxes if you inherit and then sell a home that’s part of an expensive estate in 2010. That is, if a house your parents bought for $500,000 is now worth $5 million, expect a major tax hit if you sell. Talk to an estate planning lawyer before posting a “For Sale” sign on the lawn. The good news is that most experts expect the usual full step-up to return in 2011.