When you’re trying to understand the finer points of estate planning, it’s important to understand the concept of stepped-up basis. This term refers to the process of determining the taxable basis of inherited property.
Simply put, when you inherit property, the value of the assets for tax purposes is not necessarily the same as the market value at the time of inheritance. Instead, the value of the assets is “stepped-up” and is based on the fair market value on the date of death. This means that you only pay taxes on the value of the property on that day, rather than the original purchase price.
For example, let’s say you inherit a house from your grandmother that was originally purchased for $50,000. Now, the house is worth $100,000. Your stepped-up basis would be the current market value of the house on the date of death, which is $100,000. This means that you only pay taxes on the $50,000 increase in value.
In some cases, you may find that the stepped-up basis is actually less than the market value of the property on the date of death. This means that you have a “stepped-down” basis and you would be responsible for paying taxes on the amount of the decrease.
As you can see, understanding stepped-up basis is essential when it comes to estate planning. It’s important to keep in mind that this concept only applies to inherited property, not to property that you have acquired through other means, like purchasing it on the open market.
It’s also important to remember that the taxes on the stepped-up basis will depend on the type of property that you have inherited. For example, if you receive stocks and bonds, you will be subject to capital gains tax, while real estate holdings may be subject to property tax. Be sure to consult with a qualified tax expert to determine the best way to handle the taxes on your inherited property.