When developing a comprehensive estate plan, it is important that you consider current tax laws. This will allow you to choose a strategy that will help minimize your tax liabilities while also achieving your estate planning goals. One of the most important tax liabilities to consider is the potential of capital gains tax. Many successful estate planning strategies will minimize capital gains tax liabilities by taking advantage of what is known as a “step-up in basis.” 

What is step-up in basis? 

The readjustment, for tax purposes of an inheritance, of the valuation of an asset that has increased in value is referred to as a step-up in basis. This changes the valuation of the asset for tax purposes when the asset transfers ownership to an heir. A step-up in basis will take the value of the asset upon inheritance when calculating capital gains taxes when your heir eventually sells the asset in the future. 

How does step-up in basis work? 

There are many types of assets that step-up in basis can apply to with one of the most common being real estate. Assume that you purchased a home for $250,000 which has continuously appreciated over the years. If by the time you pass away and the property is transferred to your heir the property is valued at $500,000, when your heir eventually decides to sell the property, this will be the cost basis used to determine the capital gains tax charged. 

Therefore, if your heir sells the home for $600,000 he will only be liable for $100,000 worth of capital gains for tax purposes. This means the first $250,000 in appreciation is exempt from capital gains tax liability. 

Community property states 

Those who live in a community property state have the opportunity to take advantage of the step-up in basis rule twice. This happens when you and your spouse own an asset, such as a home, and your spouse passes away and full ownership of the home transfers to you. If you were not in a community property state, only half of the co-owned home would receive a step-up in basis. Alternatively, in a community property state, you would receive a step-up in basis of the entire home. 

Then, when you eventually pass away, your heir will also receive another step-up in basis when he or she inherits the home. Essentially, your heir will benefit from a step-up in basis twice. 

Planning to take advantage of step-up in basis 

As you can see, it is highly important to consider the step-up in basis rules when developing a comprehensive estate plan. You should also keep up with any changes to the rule that might affect your tax mitigation strategy. Working with a professional financial advisor can help you keep up to date. Failure to consider step-up in basis rules can result in your intended beneficiaries having to pay more capital gains taxes in the future than they otherwise would have had to.



The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This information was developed by Redfern Media, an independent third party. Expressions of opinion are as of this date and are subject to change without notice.  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.