What is a Step Up in Basis to the Date of Death Value?

“Step up in basis to the date of death value” refers to a tax provision where the cost basis of an inherited asset is reset to its fair market value (FMV) on the date of the decedent’s death

. This adjustment is also known as a stepped-up basis. 

How it works:

When someone inherits an asset, like real estate or stocks, the new owner’s tax basis in that asset becomes the fair market value of the asset on the date of the original owner’s death. This is a significant benefit for heirs, as it can significantly reduce capital gains tax liability if they later sell the asset. 

Example:

Imagine someone bought a house for $100,000, and at the time of their death, it’s worth $500,000. If the heir inherits the house and later sells it for $550,000, their capital gains tax would be calculated based on the difference between the selling price ($550,000) and the stepped-up basis ($500,000), meaning they’d only be taxed on the $50,000 increase in value since the inheritance. Without the step-up in basis, the heir would be taxed on the entire gain of $450,000 from the original purchase price. 

Why it matters:

• Reduces Capital Gains Taxes: The step-up in basis effectively eliminates capital gains tax on the appreciation that occurred during the original owner’s lifetime.
• Estate Planning: This provision is an important aspect of estate planning, as it allows individuals to pass appreciated assets to heirs without triggering a significant tax burden.
• Encourages Asset Retention: It may also encourage people to hold onto assets until death, rather than selling them during their lifetime and realizing capital gains. 

Important considerations:

• Fair Market Value: Determining the fair market value on the date of death is crucial and may require appraisals or other valuations, especially for assets like real estate or collectibles.
• Community Property States: In community property states, a surviving spouse can receive a full step-up in basis on both halves of community property.
• Exceptions: Not all assets qualify for a step-up in basis. For example, inherited retirement accounts generally do not receive this adjustment.
• Alternate Valuation Date: In some cases, the executor of an estate may elect to use an alternate valuation date, which is six months after the date of death, if the asset’s value has decreased. 

Note: It’s crucial to consult with a tax professional or financial advisor for personalized advice regarding inherited assets and the step-up in basis rule, as tax laws can be complex and specific situations may vary.