Step-Up Basis

Step-Up Basis: Step-up basis refers to the adjustment of the value of an Asset for tax purposes when it is inherited. Instead of inheriting the Asset at the original purchase price (cost basis), the heir receives the Asset at its fair market value on the date of the original owner’s death. This adjustment can significantly reduce Capital Gains Taxes if the heir sells the Asset later.

Example: If an individual bought Shares of Stock for $10,000 and their value increased to $20,000 at the time of their death, the heir who inherits the Stock would have a step-up basis of $20,000. If the heir later sells the Stock for $22,000, they would only pay Capital Gains Tax on the $2,000 gain (the difference between the sale price and the stepped-up basis) instead of the $12,000 gain based on the original purchase price.

Case: Consider a property originally purchased for $300,000. If the property appreciates to $600,000 at the time of the owner’s death, the heir receives the property with a step-up basis of $600,000. If they decide to sell it for $620,000, they would only report $20,000 as taxable gain, minimizing their tax Liability compared to if they had inherited it with the original basis of $300,000.