The step-up in basis is a tax benefit that commonly comes with inherited assets, but is just as often misunderstood. If you recently inherited assets or may in the future, here are the basics of the rule and some planning considerations.
What “basis” means
First, let’s look at a couple definitions. Basis is generally what the owner paid for an asset, adjusted for improvements, depreciation, return of capital, etc. Capital gain (or loss) equals the sale price minus the basis.
At death, many capital assets (stocks, real estate, business interests, collectibles, crypto, etc.) are stepped up (or down) to their fair market value (FMV) as of the date of death (or, if elected by the executor, the “alternate valuation date” six months later). The heir’s new basis is that FMV, erasing the tax on any unrealized gain or loss that accumulated during the deceased person’s life.
For example, your father bought ABC stock many years ago for $50,000. At his death, it’s worth $220,000. Your inherited basis is $220,000. If you sell immediately for $220,000, there’s no capital gains tax. Hold it and sell later for $260,000 and you’ll only recognize the $40,000 gain since the date of death.
Some assets don’t receive a stepped-up basis. For example, 401(k)s and IRAs are excluded.
Actions for heirs and future estates
There are some steps that heirs and individuals planning their estates can take.
After a death, heirs should:
- Document the FMV of assets on the date of death. You can use brokerage statements, appraisals, Zillow printouts, cryptocurrency exchange screenshots, etc.
- Retitle assets into your name or trust as soon as possible to avoid administrative issues.
- Keep meticulous records. You may sell years later, or the IRS may question you.
Asset owners planning ahead should:
- Inventory low-basis assets you plan to hold and include in your estate.
- Harvest losses strategically to offset gains you can’t eliminate through a step-up.
- Coordinate gifting and lifetime transfers. Remember that gifts use a carry-over basis. This means if you are given a gift (rather than an inheritance), your basis is generally the same as the donor’s was when the gift was made.
Good records and proactive planning
These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. And gifts made just before a person dies (sometimes called “death bed gifts”) may be included in the gross estate for tax purposes.
Reach out to us for tax assistance when estate planning or after receiving an inheritance. Your Rudler, PSC advisor can help you chart the most tax-efficient path forward. Contact us at 859-331-1717.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Marianna Weisbrod, Staff Accountant and Drew Sullivan, Assurance Manager.
If you would like to discuss your particular situation, contact Marianna or Drew at 859-331-1717.
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