Step-Up in Basis

The Step-Up in Basis refers to a tax provision that allows the value of an asset to be adjusted to its fair market value at the time of the owner’s death, rather than the original purchase price. This adjustment can significantly reduce capital gains taxes that heirs may owe if they sell the inherited asset.

When an individual inherits an asset, such as real estate or stocks, the basis—which is essentially the value used to determine gain or loss for tax purposes—is "stepped up" to the market value on the date of the decedent’s death. For example, if a parent purchased a home for $200,000 and it is worth $500,000 at the time of their death, the heir’s basis in the home would be adjusted to $500,000. If the heir later sells the home for $510,000, they would only owe capital gains tax on the $10,000 gain rather than the $310,000 gain that would have resulted if they had inherited it at the original purchase price.

This tax benefit is particularly important in estate planning, as it allows individuals to pass on appreciated assets to their heirs with a reduced tax burden, thereby preserving family wealth. However, it is essential to be aware of specific state tax laws and implications, especially in Texas, where no state income tax exists, potentially enhancing the benefits of a step-up in basis for Texas residents.