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Step-Up in Basis

The “step-up-in-basis” is a term used to describe a very important tax provision that can offer substantial savings to those who own an inherited asset that has increased in value. The concept is similar to resetting the cost basis of the asset to its current market value when the prior owner (usually the original purchaser) passes away. This resetting of the asset's cost basis is especially beneficial to those inheriting property, as it reduces the amount of capital gains taxes that would otherwise be due when the property is sold.

The step-up in basis applies to all inherited assets, such as stocks, bonds, mutual funds, real estate, and businesses. Upon the prior owner's death, these assets can be “stepped up” in value to their market value as of the date of death, thereby reducing capital gains taxes due when the asset is sold by the new owners. Without this provision, the asset would be valued at the original purchase price and any appreciation in the value would be subject to capital gains taxes when the new owners sell the asset.

Residents of states with community property laws may qualify for a step-up in basis on community property. In this scenario, the surviving spouse would be able to “step up” the property’s basis to the market value on the date of the other spouse’s death. This offers tax savings opportunities, as the surviving spouse would be able to pass the asset to heirs without incurring capital gains taxes on the increased value. This can significantly reduce the potential tax burden, particularly in cases where the market value of the asset has appreciated greatly since purchase.

In recent years, opponents of the step-up in basis provision have attempted to limit or eliminate it, but their efforts have been unsuccessful. While this provision may seem to provide a larger benefit to those with the most wealth, it is helpful to those of all income levels and should be preserved in the tax code, due to the increased tax revenue the new owners will generate when the asset is later sold.

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