What Is Step-Up Basis?

Step Up BasisRecently, a good friend had her mother pass away suddenly. When I got the call, I reached out immediately, having been through a similar situation with my own parents. Aside from wanting to express my sympathy and support, I did also want to make sure my friend and her siblings were aware of an important tax ramification that my sister and I had learned about – that being the step-up basis.

When our Dad passed away shortly after our Mom, we were told about step-up basis and how there were a few things we needed to do in a short period of time.  Of course, our first question was – what the heck is step-up basis? Here’s how I explain it – when someone dies, their assets (real estate, stocks, etc.,) are re-assessed in value based on their date of death.  Now not all assets are included in this, so talk to a qualified expert about what in your portfolio is and isn’t, but most real estate definitely is.

Our Story

The hardest thing for my sister and me, and what I needed to make my friend aware of, is that during this time of shock and sorrow, you now have to focus on something very business-like. What my sister and I really wanted to do was just stay in our pajamas and watch Netflix, but timing is definitely of the essence when it comes to a step-up basis. So, we put on real clothing and had a few realtors come over to provide us with competitive analyses.  Our accountant was then able to take those and use them for the revaluation of the condo we now owned.

When we sold our condo, the capital gains taxes we would have had to have paid would have been based on the valuation that we got from those realtor appraisals. As it happened, our sale price was pretty much the same as the new basis, so we didn’t have to pay anything in capital gains.

My Friend’s Situation

For my friend, her situation was a pretty different. There were multiple siblings and step-siblings, and a step-father who was still alive but mentally incapacitated. We agreed that the best step forward was not a realtor appraisal, but a professional appraisal. By having this third party whose area of expertise and training is property valuation, it would remove any possibility of argument with the valuation.

So their property, which was originally purchased on the mid-Peninsula in the 1970’s, was revalued to 2018 rates, wiping out huge capital gains implications.  Additionally, because their step-father was still alive, for the next two years after their mom’s passing, they could sell the property and get the “couple’s exemption” on the profits. This means that, even if the property continues to climb in value, for two years they can be exempt from paying taxes on up to $500,000 in additional capital gains.

Let’s look at it this way, based on hypotheticals numbers:

Original purchase price in 1970 $82,000
Appraisal value in September, 2018 $4,500,000
Sale price in October, 2019 $4,800,000
Capital gains from sale $300,000
Capital gains taxes due on $0

If we take the same scenario, but place the selling price more than two years out, the exemption will now be for a “single” and be reduced to $250,000:

Original purchase price in 1970 $82,000
Appraisal value in September, 2018 $4,500,000
Sale price in October, 2019 $4,800,000
Capital gains from sale $300,000
Capital gains taxes due on $50,000

When you look at just those first two numbers – the original and appraisal prices – you can see how huge the benefit is to the trust and its beneficiaries. But the timing of the appraisal is extremely important. You need to do this as close to the date of passing as possible to have the most accurate rate.  

To learn more about step-up basis, be sure to consult your accountant. This post shares my personal experiences and I’m not an accounting professional.


IMPORTANT NOTE: I have not and will not verify or investigate the information supplied by third parties.

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