A step-up in basis is the readjustment of the value of an appreciated asset, such as real estate, for income tax purposes upon inheritance. The value of the property is based on the fair market value on the date of the decedent’s death. While we love and miss the dearly departed, the assets they leave behind must be dealt with appropriately. It’s important for the beneficiaries to know that significant tax savings may be available to them, and are entitled to a step-up in basis.

Examples of Step-up in Basis

There are many different types of situations in which this may occur; here is a simple example:

A husband and wife jointly own a rental house. The rental house was originally purchased decades ago for $40,000 and the portion of the cost that was allocated to the building, $30,000, fully depreciated. Let’s say the husband passed away in 2018, when the rental property was valued at $320,000. At that time, the husband’s share of the fair value of the property, $160,000 (one half of $320,000) was transferred to the wife at a stepped-up basis. This would have added to the wife’s total cost basis in the rental property, thus greatly decreasing any taxable gain if she were to sell the property shortly thereafter. Also, after allocating a portion of the value of the property to land (which is not eligible for depreciation), say $40,000 of the $160,000, the remaining $120,000 would then be treated as a new asset and depreciated in full over the useful life of the property. This would provide deductions against the rental income generated by the property, thus reducing any taxable income.

Another example of a situation that would result in a step-up basis is when a property is passed on to the heirs of a decedent. Regardless of the original cost basis of the property, the stepped-up basis (equal to the fair market value at the time of the decedent’s death) is transferred to the respective heirs. Thus, if the property is sold for an amount equal to the stepped-up basis, then there would be no taxable gain for the heirs at the time of sale.

Obtain an Appraisal

TIP: A proper appraisal for any inherited property will greatly aid in providing adequate substantiation of the stepped-up basis being applied in the event of potential scrutiny by the Internal Revenue Service.  Any applicable appraisal should be performed to represent, as closely as possible, the fair market value as of the date of the death of the decedent.

For more information regarding Step Up in Basis, please contact Greg Fusco at 401-921-2000 or gfusco@disantopriest.com.

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