Stepped Up Cost Basis

Stepped Up Cost Basis

May 12, 2021

Imagine inheriting a large asset from a loved one and upon sale, learning that you have a major tax liability on your hands. Until now, it was normal for large legacy property and other assets to be passed down for generations with little tax consequences, but there have been some rumors that this could be changing as we know it.

One of the biggest reasons people leave assets to their loved ones to inherit isn’t just because they want to hold onto the property during their whole lifetime. In fact, a lot of people want to gift to their children much earlier on, however there is a key tax benefit to waiting that is too enticing to pass up – Stepped Up Cost Basis.

Cost Basis is the original value of an asset. In other words, what it was bought for. Let’s look at a house as an example – your parents may have purchased their home a long time ago for $200,000. This makes their cost basis - $200,000.

Now imagine that they’ve lived in their home for many, many years and its market value has grown to $1M. As it stands today, if you were to inherit this after your parents have passed, the house receives a “step up” in basis, meaning the new cost basis is now $1M. When you go to sell the home there is no capital gains tax on that growth.

So why does this matter?

There are some new tax law proposals that suggest eliminating this benefit. While proposals like these are merely that, just ideas at this point, it is important to start working with your advisors to ensure you have a plan.

Should this benefit be eliminated, families will need to discuss other options, such as gifting much sooner, so they don’t trigger a major tax liability later on and thus may need to amend their estate planning documents.

If you think this may have an impact on you family, make a plan with your advisor ahead of time to avoid scrambling and extra stress.  


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.