Step Up in Basis Part 1: A Key to Understanding Your Inheritance

 If you stand to inherit assets, it is crucial that you get the gist of the often-misunderstood concept of step up in basis. This is an area that is more pertinent then ever before as the aging U.S. population looks to transfer a large amount of wealth to the next generation.  The rules are a little different depending on what type of asset you are dealing with, but this blog is going to focus on “real assets” such as property.

In order to fully understand this topic, you need to know what cost basis means.  Your cost basis is simply how much you paid for something.  If you bought some land for $10,000 then your cost basis in the property is $10,000.  If that property appreciates in value and you sell it for $100,000 then you have realized a $90,000 capital gain.  The IRS allows you to subtract the original $10,000 (your cost basis) from the $100,000 sale price because you already paid tax on the $10,000.

Next you need to understand what step up in basis means.  A step up in basis typically occurs when somebody dies and leaves assets to their heirs.  Using our land example again, let’s say that Mom bought a property back in 1960 for $10,000 and left it to you in her will when she died.  The fair market value upon Mom’s death is $100,000.  If Mom sells the property the day before she died she would have a $90,000 capital gain.  However, if Mom leaves the property to you in her will, and you decided to sell it the day after the funeral, you would pay no capital gains tax on the sale proceeds.  The reason for this is that the IRS gives you a full step up in basis at the date of death.  So the $10,000 cost basis that represents the property’s original purchase price is now stepped up to the current market value of $100,000.

In our next blog, we will focus on step up in basis when you are dealing with securities such as stocks, bonds, mutual funds, etc.

Matthew Trujillo is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors, of RJFS, we are not qualified to render advice on tax or legal matters.  You should discuss tax or legal matters with the appropriate professional.