When planning your financial legacy, understanding tax terms can make a real difference. One important concept that often comes up is “step up in cost basis.” But what does that mean, and why should you care?
When someone inherits an asset, such as a home, stocks, or other investments, the IRS may reset the cost basis of that asset to its fair market value at the time of the original owner’s death. In simpler terms, the value used to calculate gains for tax purposes “steps up” to whatever the asset was worth when you inherited it, not the price the original owner paid for it.
Here’s why this matters: capital gains tax is normally calculated based on the difference between what you paid for something and what you sell it for. But with a stepped up basis, that gain is often much smaller or even zero if the asset isn’t sold long after inheritance.
It’s important to note that this tax benefit applies to assets passed on at death. Assets given as gifts during someone’s lifetime typically follow a “carryover basis,” where the recipient assumes the original cost basis instead of receiving a step up.
Understanding how step up in basis works is an important part of estate planning and can have a major impact on your family’s financial future. For more detailed guidance on how this applies to your situation, contact our experienced estate planning attorneys at Grissom Law Firm, LLC, our attorneys will help you protect what matters most.
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