Define: Stepped Up Basis

Stepped up basis refers to the readjustment of the value of an appreciated asset for tax purposes upon inheritance. The basis is “stepped up” to the fair market value at the time of the original owner’s death, which can result in a lower capital gains tax for the inheritor.

When an individual inherits an asset, the value of the asset is “stepped up” to its fair market value at the time of the original owner’s death. This means that the inheritor’s cost basis for the asset is the fair market value at the time of inheritance, rather than the original purchase price.

Most assets that are subject to capital gains tax can receive stepped up basis upon inheritance, including real estate, stocks, and other investments.

Certain assets, such as retirement accounts and annuities, may not receive stepped up basis upon inheritance.

Stepped up basis can result in a lower capital gains tax for the inheritor, as the cost basis of the inherited asset is adjusted to its fair market value at the time of inheritance.

Stepped up basis can potentially reduce or eliminate capital gains tax for the inheritor, depending on the value of the inherited asset and the time it is sold.

To establish stepped up basis, the inheritor will need to provide documentation of the fair market value of the inherited asset at the time of the original owner’s death, such as an appraisal or other valuation.

No, stepped up basis only applies to assets inherited upon the original owner’s death, not to gifts given during the original owner’s lifetime.

Stepped up basis can be an important consideration in estate planning, as it can impact the tax consequences for heirs and beneficiaries.

While it is not required to have a lawyer, consulting with a legal professional can be helpful in understanding and navigating the complexities of stepped up basis and its implications for taxes and estate planning.