ACCA Taxation (F6) Practice Exam

How does market value at the time of death affect property transferred to a spouse?

1. It is irrelevant for tax purposes

2. It establishes the value for tax exemption

3. It determines the resale value

4. It resets the cost basis for the inheritor

The correct answer is: It resets the cost basis for the inheritor

The correct answer focuses on the principle that the market value of property at the time of an individual's death is significant for determining the cost basis of inherited assets. When property is transferred to a spouse (or any beneficiary) upon death, it typically receives a "step-up" in basis. This means that the cost basis of the property is adjusted to its fair market value as of the date of death. This adjustment is crucial because it effectively eliminates any capital gains that may have accrued during the decedent's lifetime for the inheritor when they eventually sell the property. By resetting the cost basis to the market value at the time of death, the inheritor benefits from a potentially lower tax burden should they choose to sell the property later. In considering the context of the other options, the relevance of the market value for tax purposes cannot be overlooked; it is directly linked to the cost basis reset instead of being considered irrelevant. While it does inform potential resale values, that is not its primary function in this context. And while it does influence tax exemptions, it is primarily the restatement of the cost basis that is pivotal for the inheritor's tax situation. Thus, the adjustment of the cost basis to the market value at death is fundamental to understanding the