Estate Planning: What is a Step Up in Basis?
Tax planning can be an important part of estate planning. A step-up in basis is an estate planning tax rule that can allow for the adjustment of the cost basis of an inherited asset to its fair market value on the date of the original owner’s death. That could potentially eliminate capital gains tax liability. In this article, our St. Petersburg estate planning attorney explains the key things to know about what a “step up in basis” is and why it can be relevant for tax planning.
Background: What is a Tax Basis and Why Does it Matter?
As a starting point, it is important to understand what a tax basis actually is and why it matters for capital gains tax planning purposes. Broadly speaking, the term “tax basis” refers to the value used to calculate capital gain when an asset is sold. In other words, it is the starting point. In most cases, the basis equals the price originally paid for the property, adjusted for certain improvements and/or depreciation. When the asset is later sold, the owner must generally pay capital gains tax on the difference between the sale price and the adjusted basis.
For example, imagine that a vacation home in Florida is purchased for $250,000. 25 years later that home is sold for $600,000. Without any adjustments, the tax basis would be $250,000. There would be a $350,000 capital gain. That is the amount that would be potentially taxable. The rule can create large tax exposure for assets that appreciate significantly over time. Real estate, investment property, and stocks often increase in value for decades.
How the Step-Up in Basis Rule Works for Inherited Property
When a person dies, most assets included in the taxable estate receive a new cost basis equal to their fair market value on the date of death. The adjustment is commonly called a “step-up in basis.” The rule appears in Section 1014 of the Internal Revenue Code and applies to many forms of property, including real estate, securities, and certain business interests. The new basis replaces the original owner’s purchase price for tax purposes. If the heirs later sell the asset, capital gains tax will apply only to appreciation that occurs after the date of death. In many situations, this eliminates decades of built-in capital gains. For example, a home purchased for $150,000 that is worth $900,000 at the owner’s death will generally receive a new basis of $900,000. If heirs sell the property shortly thereafter for roughly the same amount, little or no capital gains tax may be due.
Speak to Our St. Petersburg, FL Estate Planning Lawyer Today
At Fisher & Wilsey, P.A., our St. Petersburg estate planning lawyer has the professional expertise that you can trust. If you have any questions about estate planning and tax issues, please do not hesitate to contact us for a completely confidential case evaluation. Our firm handles estate planning issues in St. Petersburg, Pinellas County, and throughout the broader region in Florida.
Source:
law.cornell.edu/uscode/text/26/1014
