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What Is a “Stepped Up Basis,” and How Does It Affect My Estate Planning?


One aspect of estate and probate administration that many Florida residents do not fully appreciate (or even understand) is the “stepped up in basis” applicable to many types of inherited property. This is a legal concept tied to capital gains taxes, which itself is a subject that confuses many people. With that in mind, here is a brief explanation of what the stepped up basis is and how it may affect your own estate planning.

How Capital Gains Taxes Work

Most of us are familiar with the income taxes we pay via employer withholding. But individuals also need to pay tax on any “capital gain,” i.e. income from the sale of an asset, such as our house or shares of stock. If you hold an asset for less than one year, it is considered a “short-term” capital gain, which is then taxed the same as any other income you report on your 1040. If you hold the asset for longer than one year, it is a “long-term” capital gain, which is generally taxed at a lower rate.

Of course, if you are taxing the “gain” on the sale of an asset, you need to know its starting value. Normally that is the price you paid for the asset. To give a simple example, Jane buys a house in Fort Myers in 1999 for $100,000. She then sells the property in 2019 for $350,000. Her capital gain on the sale is therefore $250,000.

But suppose Jane passed away at the start of 2019. Since Jane planned ahead, she had a last will and testament leaving the house to her oldest son, George. Because George lives in New York and does not want to hold on to his mother’s house, he sells it for the appraised fair-market value at the time of her death, which is $350,000. So what is George’s capital gain on the sale?

The answer is zero. Once the owner of a piece of real property dies, the tax basis shifts or “steps up” to the value on the date of death. The heir then receives the property starting from the new tax basis. So in the hypothetical example above, George received property worth $350,000 and sold it for that same amount, meaning there was no capital gain on the sale.

This same stepped-up basis applies to stocks. Suppose Jane purchased 100 shares of Acme, Inc., for $1,000 in 1989. When she died in 2019, those shares were now worth $50,000. George would inherit those shares at the stepped-up basis of $50,000, meaning he would not owe any capital gains tax if he sold the stock at that value.

Speak with a Florida Estate Planning Attorney Today

It is important to note that not all inherited assets followed the stepped-up basis rule. Many retirement accounts, such as IRAs and 401(k) plans, are not subject to a readjustment in tax basis after the owner’s death. A qualified Fort Myers estate & probate administration lawyer can help explain this to you in greater detail. Contact the Kuhn Law Firm, P.A., at 239-333-4529 to schedule a free confidential consultation with a member of our estate planning team today.

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