Everyone considering passing along their hard-earned wealth to their children or grandchildren should know about and understand the benefits of the stepped-up basis loophole. Congress makes this tax advantage available to families who carefully build wealth through the acquisition of stocks, real estate, and other investment vehicles. It differs from giving gifts during a lifetime because these have a variety of limitations and exclusions.
While every dollar of gifts (above the annual gift exclusion) during a lifetime reduces the donor’s federal estate tax exemption by the same dollar amount, the stepped-up basis does more. The stepped-up basis offers a huge tax advantage because it reduces the capital gains taxes when an inherited asset is sold. In terms of amassing money in a tax-efficient manner, the stepped-up basis tax loophole means qualifying stocks, real estate, and other assets your family inherits base their fair market value on the date of inheritance.
The cost basis factor is a critical tax concept. How an asset is acquired greatly influences this basis. An asset received as a gift, has the same basis as that of the original owner. An asset gained through inheritance has a basis equal to the fair market value of the asset on the date of death. This is what is called a stepped-up basis. Consider the following example: Real estate with a basis of $100,000 and a fair market value of $1 million is willed to your son or daughter. Under the stepped-up basis, if they sell the property for $1 million dollars, their tax liability is zero; however, if they receive the property during your lifetime, the tax liability is calculated on a capital gain of $900,000.
If you’re unfamiliar with tax laws, tax basis’, and tax liabilities, call the estate planning attorneys at Grissom Law, LLC. We have the skills, experience, and expertise you can rely on to ensure your children and grandchildren inherit everything you want them to inherit without being forced to pay a small fortune in taxes. Don’t try to navigate tax law alone. The tax regulations in the state of Georgia are our specialty. We’re here to help ensure your assets go exactly where you want them to go – and that you and your family have invaluable peace of mind.
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