The Step-Up in Basis & Capital Gains Tax

Estate and gift tax consequences vary from estate to estate depending on the size and value of the estate and the place where the decedent died.  The concept of a step-up in basis is a federal one affecting beneficiaries nationwide, and a recent proposal from the Biden administration has threatened to eliminate it from the estate and gift tax paradigm.

Basis is the original value of any asset when it was purchased.  This includes assets like homes, shares of stock, collectibles, art, etc. The concept of a step-up in basis allows families to leave assets to their heirs without the heirs having to pay a capital gains tax on the increase in value of that asset during the decedent’s lifetime. This tax, under current law, is only due when the asset is sold. This is done by “stepping up” the basis of the asset to the value of the asset on the date of the decedent’s death.  This means that if a family home was purchased for $250,000 and then appreciated during the decedent’s lifetime to $1,000,000, the heirs would not have to pay income tax on the $750,000 in capital gains upon its sale. This is because the tax basis would be stepped up to the $1,000,000 value of the house as of the date of the decedent’s death and no gain would be recognized. Date of death value is usually determine by an appraisal of the asset. If the house is later sold for $1,250,000, only tax on the $250,000 in gain from the date of death to the date of sale is assessed. In the case of stocks, the stepped up basis is the average between the high and low trading prices on day of death.

The current estate tax rules largely impact only the wealthy, as the current federal estate tax exemption amount is $11.7 million dollars per person, and even in a highly taxed state like New York, each individual has a state estate tax exemption amount of $5,930,000 per person (as of 2021).  However, the proposed elimination of the step-up in basis for gains in excess of $1,000,000 would impact a larger number of estates and thus a greater number of families.

The proposal would disproportionately impact those living in large metro areas as they have seen a surge in home prices in recent years.  It would also largely impact those estates who have largely illiquid assets such as real estate. There is even a proposal which would assess a capital gains tax would even if the asset is not sold by the beneficiary (called mark to market) for certain estates.  This could force heirs to sell the family home they inherited, liquidate inherited requirement accounts and even dramatically impact business assets.

Contact the Law Offices of Roman Aminov, P.C. for estate planning services in New York City at 347-766-2685 to discuss the potential impact of the elimination of the step-up in basis on your family.

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