Basis Step-up: How to take advantage of the rule

What is The Step-Up Basis Rule?

Anyone with assets that have significant appreciation should know about 26 U.S. Code § 1014. It is a unique rule in the U.S. where upon death, assets will transfer to heirs with a new cost basis (FMV at the date of death.) This rule is best explained by example:

Let’s say Grandpa purchased his primary residence in 1985 for $180,000 and he has lived in the same home all his life. In 2020, this property has a fair market value of $1,300,000, which means that grandpa has an unrealized gain of $1,120,000. Therefore, if Grandpa decided to sell the property the next day for FMV ($1,300,000), he would have to pay capital gains tax on $1,120,000. 

Now let’s say Grandpa made use of the step-up rule.

Grandpa does not sell his low basis property and upon his death it transfers to his son, Tommy. On the date of death of Grandpa, the Property has an FMV of $1,250,000. The next Day, Tommy decides to sell the property and he finds a willing and able buyer to purchase for $1,300,000. Tommy is responsible to pay capital gains tax on the difference between the sale price and his new cost basis ($1,300,000 – $1,250,000) which is $50,000.

This rule can also be used for loss depreciation, which can preserve a loss to be used to offset any other gain that is realized during the same year. 

It is crucial that you consult with legal or professional tax help when taking advantage of the step-up basis rule. 

Learn more about The Step-Up Rule.

This post is not legal advice and is written for marketing purposes only. The information should not be relied upon, You should seek legal advice when performing an estate plan or have a tax issue.