When you pass something on to your heirs, it’s smart to think about the possible tax consequences well in advance.
Step-up in basis is one of the least commonly understood aspects of tax considerations relevant for real estate investors. If you intend to pass on real estate assets to your beneficiaries, the step-up in basis rules can have a significant implication for your heirs in terms of saving money on capital gains.
When an asset is inherited because the original owner has passed away, this asset is frequently worth more than it was at the time of the original purchase. This can generate a significant capital gains tax bill.
However, the cost basis of the asset in question can be changed to its value at the time of its owner’s death – a process known as step-up in basis. This distinction only applies to those pieces of property transferred after the owner passes away. The original cost basis transfers to the inheritor if the property was transferred or gifted before the original owner dies.
It’s important to remember that even with a step-up in basis, an estate tax could still be levied. A step-up in basis does not exclude inherited property value from a taxable estate on its own. Other strategies should be discussed with your Pasadena estate planning lawyer to verify that you have considered these most important aspects.