What is step-up basis and why should I know about it? (part 2)

Step-up in basis is the reset in the cost basis of an inherited asset to its fair market value on the date of the decedent's death. Cost basis is what determines the taxes owed, if any, when the asset is sold. Cost basis starts with the price paid for an asset, plus any additional costs added over time to improve or maintain the original asset.

Step-up in basis, or stepped-up basis, is what happens when the price of an inherited asset on the date of the decedent's death is above its original purchase price. The tax code allows for the raising of the cost basis to the higher price, minimizing the capital gains taxes owed if the asset is sold later. Win! Win!

The step-up in basis provision applies to financial assets like stocks, bonds and mutual funds, as well as real estate and other tangible property.

Conversely, if the price of an asset has declined from that paid by the owner's date of death, the asset's cost basis would step down instead of stepping up for heirs.

The step-up basis we are talking about has been criticized as a tax loophole for the wealthiest families. However, real estate is always a winner with respect to appreciation, so it's not just for the wealthy – especially in California.

Some defenders of the stepped-up basis have argued that eliminating it might provide a disincentive to save and subject estates to double taxation in combination with the federal estate tax. Following the doubling of the federal estate tax exemption in 2017, a modern-era record-low 0.04% of adult deaths in 2020 produced an estate tax liability.

In 2021, a proposal backed by President Joe Biden and some Democrats that would have eliminated the step-up in basis for assets in excess of $2.5 million (plus $250,000 for a home) for a married couple failed to secure congressional approval.

Diana Wade is a Legal Document Assistant. She can be reached at (661) 821-0494 or [email protected]. Diana is not an attorney; she can only provide self-help services at your specific direction. Kern County LDA #185, exp. 4/11/25.