[COLUMN] Step-up in basis for assets transferred at death

WHAT Is a Step-Up in Basis?

The term “step-up in basis” refers to the readjustment of the value of an appreciated asset for tax purposes upon inheritance. It adjusts the value of an asset when it passes from owner to heir. The higher market value of the asset at the time of inheritance is used for tax purposes. When an asset is passed on to a beneficiary, its value is typically more than what it was when the original owner acquired it. The asset receives a step-up in basis so that the beneficiary’s capital gains tax is minimized. A step-up in basis is applied to the cost basis of property transferred at death. In summary:

  • A step-up in basis readjusts the value of an appreciated asset.
  • It is applied to the cost basis of property transferred at death.
  • Step-up in basis is used to calculate tax liabilities for inheritance assets.
  • Transferred assets receive a step-up in basis so the beneficiary’s capital gains tax is minimized.
  • There are other proposals to replace it with lower capital gains taxes.

Current Tax Law:

“Step up in Basis” may not be a household term, but folks, this is the holy grail of tax planning. It’s a tax loophole (the best) for assets transferred at death.

  • If you bought a $500,000 investment property many moons ago and is worth $2 million at your death, there’s a gain of $1.5 million. Capital gains tax would be horrendous, but would be zero (yes zero) due to the step up in basis concept. The cost of $500,000 would be “stepped up” to $2 million resulting in a gain of zero and… tax of zero!
  • I’ve used this legal concept for my clients during my 50 years of tax practice. It works beautifully.
  • Alas, this would change under Biden’s plan described below.

Proposed Tax Changes:

Proposed law would eliminate the step-up in cost basis for inherited and gifted wealth. Sigh.

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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation.

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He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies.  He published a book on “How to Avoid or Survive IRS Audits” that’s available at Amazon. Readers may email tax questions to vicsy@live.com.

 

Victor Sy, CPA, MBA (retired)

Victor Santos Sy, MBA. CPA (Retired) Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation. * * * He retired after 50 years of defending taxpayers audited by the IRS, EDD, BOE and other governmental agencies. He published a book on “How to Avoid or Survive IRS Audits” that’s available at Amazon. Readers may email tax questions to vicsy@live.com.

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