What is Basis Step-Up?

Q: What is Basis Step-Up?

Basis Step-Up adjusts the cost basis of an inherited asset to its market value at the time of the original owner's death. This reduces the capital gains tax for the heir.

Q: How does Basis Step-Up save money?

It lowers the taxable capital gain. Instead of paying tax on the gain from the original purchase price, heirs only pay tax on any gain since the date of death.

Q: Does Basis Step-Up apply to all inherited assets?

Generally, yes, for assets inherited from a deceased person. However, specific rules can vary, so it's always good to check with a tax professional.

The Short Answer

Basis Step-Up adjusts the cost basis of inherited assets to their market value at the time of death, reducing capital gains taxes for heirs.

Basis Step-Up explained simply

When someone inherits an asset, like real estate or stocks, its "cost basis" is usually adjusted. This adjustment, called a Basis Step-Up, changes the asset's value to its fair market value on the date the original owner passed away. This is a big deal for heirs because it can significantly lower the capital gains taxes they might owe if they sell the asset later. Instead of paying tax on the gain from the original purchase price, they only pay tax on any gain since the date of death.

Real-World Example

The Inherited Stock Portfolio

Imagine your aunt bought stocks for $10,000 many years ago. When she passes away, those stocks are now worth $100,000. If you inherited them and immediately sold them for $100,000, without a Basis Step-Up, you would theoretically owe capital gains tax on the $90,000 profit ($100,000 - $10,000).

However, with a Basis Step-Up, the cost basis of those stocks is "stepped up" to $100,000 (their value on the date of death). If you then sell them for $100,000, your capital gain is $0 ($100,000 - $100,000). This means you pay no capital gains tax on the appreciation that happened during your aunt's lifetime. If you sold them for $105,000, you would only pay tax on the $5,000 gain since you inherited them.

Why this matters

Understanding Basis Step-Up is crucial for anyone inheriting assets or planning their estate. It can save heirs a lot of money in capital gains taxes. For business owners, it's important to consider how this applies to business assets when planning for succession or sale, as it impacts the financial outcome for your beneficiaries.

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This is a key tax benefit for heirs. It means they often pay less in taxes when selling inherited property or investments. Make sure your estate plan considers how assets will be passed on.

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