Stepped-Up Basis: The Best Kept Secrets of the Rich (part 1 of 3)

Did you know there is a way for your children to pay no capital gains tax on the property you leave them?

It’s called the stepped-up basis rule (see IRC 1014) and it could be a game changer for your estate plan.

Why?

Because when you die, the cost basis in your assets (except for retirement accounts) reset to their fair market value. 

Let me say that in English: if you bought an investment property for $100,000 back in 1985 and that property is now worth $1,000,000, then the capital appreciation on the property is $900,000 (the difference between the purchase price and the current fair market value). This means that if you were to sell the property, then you would pay an income tax on about $900,000 (ignoring adjustments for expenses, improvements, depreciation, residence exemption, etc.).

In other words, when you sell that property during your life, you will likely have a major capital gain tax (generally 20%-25%) to deal with, which would not only subtract from a large portion of your gain, but also have other implications (like increasing your Medicare part B premiums).

So what can you do to avoid paying $180,000 in taxes? Simple - you die with the property as part of your estate.

Why?

Because at your death, the cost basis (the original $100,00 you spent to buy the property) would reset to it’s fair market value of $1,000,000 (this would be the new cost basis) and your children would then be able to sell it without paying an income tax since there is no longer appreciation or a capital gain on the property (i.e., for a short window of time there’s virtually no difference in the new cost basis of $1 million and the fair market value/selling price of $1 million).

Best of all, this rule doesn’t only apply for real estate, but can also be applied to stocks held in non-retirement brokerage accounts.

Please note: tax laws can change and there are exceptions/exemptions that may impact your decision on whether this strategy makes sense for you. Please speak with your tax advisor and/or estate planning attorney before making any decision related to your property.

In the next articles (to be published on 2/7 and 2/14) , I’ll tell you some other estate planning tricks the rich use to take this strategy to a whole different level. Stay tuned.

Interested in updating your estate plan? Give me a call at 781 202 6368, email jlento@perennialtrust.com, or click here to schedule your free personal consultation.

I’m always happy to help,

Joseph M. Lento, J.D.

Your Local Estate Planning Attorney

For client testimonials, please visit: www.PerennialEstatePlanning.com

Conveniently located at 477 Main Street, Stoneham, MA 02180