What is a step up in basis?

Sometimes people want to sell part or all of an inheritance. Fortunately, they may benefit from a step up in basis.

The “basis” of property is the value it had when you acquired it. If the property appreciates in value over time, the difference in the value from when you acquired it to the time when you sell or dispose of it is the amount of the gain, upon which you may have to pay capital gains tax.

Property that was owned by a decedent when he died, and inherited by a beneficiary, is eligible for a step up in basis. The basis for the beneficiary is measured from the fair market value at the time of the decedent’s death. If the beneficiary sells an inherited asset, any capital gains would be measured from the value at the prior owner’s death, not from the time the deceased owner first acquired the property.

This matters because the beneficiary usually will be able to sell the assets quickly without creating a large tax burden, and because a step up in basis often greatly reduces the tax that would be owed.

The step up in basis can be a tremendous value to heirs and beneficiaries who inherit real estate or certain financial assets that had grown substantially over the years or decades since they were first acquired. If contemplating whether to transfer assets while alive or through an estate plan, it can be a factor that preserves significant value.