stepped-up basis (2024)

FAQs

What are the IRS rules on stepped-up basis? ›

For these purposes, the basis for calculating gain is “stepped up” to the value of the assets on the date of death. Thus, only the appreciation in value since the individual inherited the assets is subject to tax. The appreciation during the deceased's lifetime goes untaxed.

Step-up in basis is a feature of the US tax code. It eliminates the potential of double taxation on a deceased person's assets—while the estate may owe taxes, the inheritor does not.

For inheritances, the basis is the fair market value of the asset at the time of the donor's death (or six months afterward, if the executor elects the alternative valuation date). This is the stepped-up basis).

A stepped-up basis is a tax law that applies to estate transfers. When someone inherits investment assets, the IRS resets the asset's original cost basis to its value at the date of the inheritance. The heir then pays capital gains taxes on that basis.

Typically, assets you place in trust for your beneficiaries are eligible for a step-up in basis if the trust is revocable, and therefore considered part of your taxable estate. But with an irrevocable trust (which exists outside of your estate), trust assets do not receive a step-up in tax basis.

Not all assets are eligible to receive a new basis when someone dies. For example, assets owned inside an IRA, 401(k), and other retirement accounts do not receive a step-up. Also, assets owned inside of an S-Corporation or C-Corporation usually do not receive a step-up in basis.

For example, let's say that your uncle leaves you a home that he originally purchased for $100,000. When you inherited the property, it appreciated in value to $250,000. You would enjoy the tax benefits of a step-up in basis from $100,000 to $250,000.

Applying the Step up in Basis to Real Estate Assets

The tax rule allows for half of the property value (the deceased spouse's portion) to be increased to its fair market value at the time of death. This can significantly reduce potential capital gains tax liability upon selling the property.

Even if no estate tax returns are filed, appraisals should still be obtained to determine the fair market value of the decedent's assets as of the date of death. This is important for determining the beneficiary's basis in the inherited property, which may be stepped-up to the fair market value.

What is the step-up in basis for inherited houses? ›

A step-up in basis resets the cost basis of an appreciated inherited asset for tax purposes. The cost basis for heirs is raised to the asset's market value on the prior owner's date of death, reducing future capital gains taxes.

If you made a deferral election in a QOF that meets the 5-year holding period threshold, you will be eligible for a 10% stepped-up basis.

Tax issues arising with ownership interests in partnerships

A step-up in basis of a partnership or LLC interest upon the death of a partner/LLC member will only apply to the “outside” basis, i.e., the tax basis of the interest in the hands of the successor owners.

A transfer on death (TOD) bank account is a popular estate planning tool designed to avoid probate court by naming a beneficiary. However, it doesn't avoid taxes.

The surviving spouse's half doesn't get a step up in value until he or she dies. In community property states, however, both halves of the couple's community property get the step up with the first death, said Los Angeles estate planning attorney Burton Mitchell. That's what is known as the double step-up in basis.

How Is Step-Up in Basis Calculated? A step-up in basis resets the cost basis of an inherited asset to its market value on the decedent's date of death. If the asset is later sold, the higher new cost basis would be subtracted from the sale price to calculate the capital gains tax liability, if any.

In every state, but community property states, spouses are considered joint tenants with rights of survivorship (JTROS). The surviving spouse may receive a step-up in basis for half the property when their spouse dies. The other half of the increased value would be included in the deceased spouse's estate.

If you made a deferral election in a QOF that meets the 5-year holding period threshold, you will be eligible for a 10% stepped-up basis.