Valuing a person’s estate when they die can be a complex issue, especially if they have held certain assets for a long time and those assets have realized significant capital appreciation.
Fortunately, most assets in a decedent’s estate receive a step-up in basis at death, meaning their cost basis is reset to the asset's current fair market value. This important provision can save heirs a significant amount of money in capital gains taxes when they decide to sell inherited assets.
The step-up basis tax provision is important for estate planning and inheritance matters. Let’s take a closer look.
Does Real Estate Get a Step-Up in Basis at Death?
When assets are valued on a stepped-up basis, it means that they are valued at their current fair market value rather than at their value when they were purchased. This provision applies to many different types of real property, as well as other tangible assets such as mutual funds, bonds, and stocks. Estate planners strive to use the stepped-up basis provision to preserve wealth so heirs receive greater value for certain inherited assets.
This can be especially important for assets that have realized significant appreciation over time – but the Internal Revenue Service only considers certain real property assets eligible for a step-up in basis. Here are a few of the property types that can be stepped-up to fair market value upon the owner’s death:
- Residential rentals
- Hospitality property
- Self-storage and industrial facilities
- Strip mall centers
- Medical, garden, and office buildings
- Multifamily rental properties
In some circumstances, these assets may also be eligible to receive a step-up in basis:
- Businesses and equipment
- Non-retirement accounts
- Antiques and collectibles
Do Assets Owned By a Trust Get a Step-Up in Basis at Death?
Assets held in revocable or living trusts are eligible to be valued on a stepped-up basis when the trust grantor dies. Assets held in irrevocable trusts, however, are passed to heirs at their original basis. Consulting an attorney who specializes in estate planning is perhaps the best way to determine whether assets in a trust can be valued on a stepped-up basis.
Assets That Cannot Be Valued on a Stepped-up Basis
Certain assets are not eligible to receive a step-up in basis. Many of these excluded assets are common financial tools designed to build wealth. They include:
- Retirement accounts, including IRAs and 401(k)s
- Money market accounts
- Tax-deferred annuities
- Certificates of deposit
One of the most important considerations when passing on these types of accounts to your heirs is the tax ramifications.
Can the Property Be Transferred Before Death?
One caveat to the step-up in basis provision is that assets cannot be transferred to heirs before the owner’s death – they must be transferred as part of the decedent’s estate in order to be eligible for this provision. Assets transferred before the death of the owner will be valued at their original cost basis.
The most important advice when determining how your assets will be valued when you pass them on to your heirs is to consult an estate attorney to make sure your heirs can get the maximum amount when you die. It is also important to consider the tax implications, regardless of the type of asset. A little planning can help you preserve wealth and pass on greater value of your estate to your heirs.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.