What Is A Step Up In Basis?

Let’s pretend that your grandfather was a big comic book fan, and in his will or in his estate documents he leaves to you his valuable comic book collection. The collection today could be worth hundreds of thousands of dollars.

If you later sell that comic book collection, you may owe capital gains taxes on the proceeds of that sale. Capital gains taxes account for increases in value on property that is later sold. The question is, how much was the increase in value?

What is Basis and Why does it Matter?

Basis is the cost you paid to acquire the property in the first place. If your grandfather paid $10,000 to buy his comic book collection, his basis in the collection is $10,000.

Capital gains tax is only levied against the gain, or profit from a sale. To calculate the gain on a sale, you need to know the basis, and subtract it from the sale price.  If your grandfather later sold his collection for $110,000, his gain would be $100,000, or the sale price $110,000 minus his basis in the property, $10,000.

Step up in Basis

Normally, when you give a person a gift of property, the recipient keeps your basis in that property. If your grandfather gives you his comic book collection during his lifetime, your basis in the collection would be what he paid to buy them, or $10,000. So if you then sold the comics for $110,000, your gain would also be $100,000.

However, if your grandfather were to leave the comic book collection to you at death, the comic book collection receives a basis adjustment and your new basis will be the value of the comic book collection at the time of your grandfather’s death.

This is called a step up in basis, and it can save you and your family from paying huge amounts of capital gains taxes, especially if you have property that was acquired a long time ago and has increased in value significantly. Everything from shares of stock to jewelry to houses can receive a step up in basis at death.

Property Must be Inherited

The step up in basis only applies when property is inherited at death. Many people lose the ability to step up in basis, and thus avoid untold thousands in taxes, by gifting or transferring property before they pass away. However, capital gains tax is only one potential source of tax on the property and needs to be weighed against gift, estate, income and property tax considerations.  If you have property that has increased in value, call the Torrance estate planning attorneys at Samuel Ford Law for help and to answer your questions and to plan your estate the correct way.