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What is a Step-Up in Basis?

Step Up image  One of biggest gifts given to estate planners is given to us through the Internal Revenue code.   IRC §1014 is the rule that says a beneficiary receives the basis of the decedent at the time of their death.  Step up in basis is best explained through an example.

Daredevil Dan Example #1:

Daredevil Dan purchased a rental property in Cobble Hill, Brooklyn in 1980.  He paid $100,000 for this property. The $100,000 spent for this property is called the basis.  In 2017, Daredevil Dan decided to go mountain biking in upstate New York, hit a tree, and that was the end of Daredevil Dan. When Daredevil Dan passed away the Cobble Hill property was worth $2,000,000.   According to his Last Will & Testament, Daredevil Dan’s Cobble Hill property is to pass to his son, Brian.  Brian’s basis in the Cobble Hill property will be “stepped up” to the value at the time of Daredevil Dan’s death. Therefore, Brian now owns the Cobble Hill property with a basis of $2,000,000.  If he were to sell it immediately he would owe no taxes. To calculate gains you take the amount realized, or the price sold and subtract it by the basis.  In this example it would be $2,000,000- $2,000,000 resulting in zero gains and zero taxes owed.

Daredevil Dan Example #2:

Daredevil Dan did not go to Ira K. Miller & Associates for estate planning advice. Daredevil Dan wanted to gift his Cobble Hill property to his son Brian and deeded the property to Brian in 2015, two years prior to his death. Brian would inherit the basis that Daredevil Dan paid for the property. Therefore, Brian now owns the property with a basis of $100,000. In 2017,  Brian goes to sell the property for $2,000,000.  Brian would have to pay capital gains taxes on $1,900,000.   ($2,000,000-$100,000= 1,900,000 capital gain on the property).  The capital gains tax would be between $285,000 and $380,000.    Had Daredevil Dan passed away with this property in his estate and left the property to Brian in his Will, he would have saved Brian over $250,000 in taxes.

To learn more about Estate Planning and the step-up in basis, contact Ira K. Miller & Associates.

 

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