How the stepped-up basis can save your children capital gains taxes


What is IRS step up basis? Stepped-up basis for inherited assets. The general rule applied to property a beneficiary receives from a benefactor is that the beneficiary's basis equals the fair market value of the property at the time the decedent dies.


Attorney Tom Olsen: Here are some siblings who have inherited property, and I think they are going to ask me what their tax basis is for capital gains purposes.

There is a good provision within the internal revenue code called the stepped-up basis. The step-up basis says that when you inherit a piece of property through a will or probate or enhanced life safe deed or living trust, your basis for capital gains tax purposes is a value to date of death.

If mom passes away and you inherit her home and at the moment mom died, her home is worth $200,000, and you turn around and sell it for $200,000 there will be no capital gains tax. If you wait a few years and sell it for $225,000, you will pay the capital gains on your $25,000 profit. Folks that is called step-up basis. It's part of the internal revenue code. It's a good thing.

You do want the step-up basis on any asset that’s got a low-basis on a high value. I had a long-time client call me last week. He is thinking about selling a piece of vacant land that he has owned for years for $850,000. He only paid $50,000 for way back in the day.

He is already upset because he's going to pay so much in capital gains taxes.  I said, if you don't need the money, then hold on to it and let your kids inherit it. Their basis for capital gains tax purposes will be $850,000. If your children sell it there will be no capital gains taxes.

So real life folks. If you could--when we talk about the step-up basis, it's a good thing. It’s available to you for real estate or stocks that you bought or the painting hanging on your living room wall.