Step-Up in Basis and Gifting

Tax considerations often play an important role in estate planning. One important tax implication of estate planning is the step-up in basis beneficiaries receive. Beneficiaries receive a step-up in basis on property received, if the property is an inheritance. When property is gifted, the basis in the property remains the same. However, when property is inherited, the basis is stepped up to the property’s current value. This step-up in basis becomes important when the inherited property is sold; which often happens when closing estates.  Tax is generally owed on the difference between the amount earned and the cost or basis of the property.

For example, if you buy a couch for $500.00 (this is the cost or basis) and later sell it for $700.00 (amount earned), you will owe tax on the $200.00 profit. Now let’s say that instead of selling the couch you gave it to your nephew and he later sells it for $700.00. The profit would still be $200.00 because your nephew does not receive a step-up in basis. If, however, your nephew inherited the couch when it was worth $700.00, the new basis in the couch would be $700.00. Meaning that the couch could be sold for $700.00 without incurring taxes.

Sometimes it makes sense to gift property to friends and family during life. But, it is important to evaluate the consequences of doing such actions. The step-up in basis should be an important consideration when deciding to gift property.