When you inherit property, you might wonder how the value of that property will be taxed. Understanding the stepped-up tax basis rules can help you know what to expect. These rules play an essential role in determining how much you’ll pay in taxes if you sell inherited property.
What is a stepped-up tax basis?
A stepped-up tax basis adjusts the value of inherited property to its fair market value at the date of the decedent’s death. This means that when you inherit property, the tax basis of that property is “stepped up” to the current market value instead of the original purchase price. For example, if the decedent bought property for $100,000, but it’s worth $200,000 at their death, your new tax basis would be $200,000. This adjustment can reduce the amount of capital gains tax you owe when you sell the property.
How does the stepped-up tax basis affect capital gains taxes?
The stepped-up tax basis reduces your potential capital gains tax when you sell the inherited property. If you sell it for a price higher than the stepped-up value, you’ll pay capital gains tax on the difference between the selling price and the stepped-up value. For instance, if you sell the property for $250,000 and your stepped-up tax basis is $200,000, you’ll owe taxes on the $50,000 difference.
Are there exceptions to the stepped-up tax basis?
While the stepped-up basis generally applies to most inherited assets, there are exceptions. For example, certain types of property, like retirement accounts, don’t qualify for this benefit. It’s important to consider what types of assets you inherit and how they may be taxed differently.
The stepped-up tax basis rule is a significant advantage when inheriting property, as it can reduce your overall tax burden. By understanding how it works, you can plan ahead and avoid unexpected tax surprises when selling inherited assets.