What is Stepped Up Basis in Estate Planning?

Basis is the amount that a person has invested in an asset for tax purposes. Basis is used to calculate a variety of other aspects of an asset such as depreciation, amortization, depletion, casualty losses, and the loss or gain the owner experiences on the sale, exchange, or disposition of a property. This post discusses how to determine basis for inherited items.

An individual who inherits an asset takes a stepped up basis in the asset. This stepped up basis is equal to the fair market value of the asset on the date the decedent passed on. For purposes of example, assume that an individual purchased a home for $10,000. Next, assume that, when the purchasing individual died, the home had a fair market value of $50,000. The individual who inherits the home takes a stepped up basis of $50,000.

(Photo credit: james.thompson)

So how does this affect you, as the inheritor? Imagine that the person who inherited the home with a stepped up basis of $50,000 now wants to sell the home. If he sells it for $50,000, he will not owe any capital gains taxes on the sale. However, assume the inheritor sells the home for $100,000. In this case, he will owe capital gains taxes on the difference between the sale price ($100,000), and the stepped up basis ($50,000), or $50,000.

For assistance in determining the tax consequences of assets that you have inherited, contact us at (626) 696-3145.

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