Stepped Up Basis | CV Appraisal

Step Up Basis

The step up in basis at death is an important provision within the tax code that can benefit those inheriting assets. It resets the value of inherited assets to their fair market value at the decedent’s death, reducing future taxes on capital gains. In this article, we’ll explain how this rule works, its benefits, and what types of assets qualify.

Key Takeaways

The step-up in basis at death resets the value of inherited assets to their fair market price at the time of the decedent’s death, reducing potential capital gains taxes for heirs.

Various capital assets, including real estate and stocks, qualify for the step-up in basis, while exceptions exist for certain retirement accounts and gifted property.

Proper valuation of inherited assets is essential for establishing the new basis.
Understanding Step Up in Basis at Death

The step-up in basis is a tax code rule that resets the value of an inherited asset to its fair market price at the time of the decedent’s death. The Internal Revenue Service (IRS) plays a crucial role in determining this fair market value, facilitating the calculation of taxes on estates and gifts. This change creates a new basis for tax purposes. Usually, this adjustment increases the asset’s cost basis, under the assumption that fair market values typically increase over time.

This provision can be especially advantageous for a person inheriting high-value assets, as it significantly mitigates the capital gains taxes owed upon sale.

Example of Stepped Up Basis

If a property bought for $100,000 is worth $500,000 at the time of the owner’s death, the heir’s new basis becomes $500,000. If the property is sold for $550,000 later, the heir’s capital gains taxes would be owed only on the $50,000 increase, not the $450,000 increase from the original purchase price.

While not common, if the value of an asset decreases after the owner’s death, its basis steps down rather than up for the heirs. This will probably increase, rather than decrease, the tax on the sale of the inherited asset.