When it comes to real estate and taxes, there are many strategies that investors and homeowners can use to maximize their financial benefits. One such strategy that often flies under the radar is the step-up in basis, which can significantly reduce capital gains taxes when inheriting property.
What Is a Step-Up in Basis?
If you inherit a property, the IRS provides a tax benefit known as a step-up in basis. This means that for tax purposes, the value of the property is reset to its fair market value at the time of inheritance, rather than the original purchase price paid by the previous owner.
For example, let’s say your parents purchased a home decades ago for $100,000, and at the time of their passing, the property is worth $500,000. If you inherit the home, your new basis in the property is $500,000—not the original $100,000.
How Does This Affect Capital Gains Tax?
The step-up in basis can greatly reduce capital gains taxes if you decide to sell the property. Instead of paying taxes on the difference between the original purchase price and the selling price, you’ll only be taxed on the appreciation after the time of inheritance.
Let’s say you inherit the home at a $500,000 valuation and sell it for $510,000 a few months later. Your taxable gain is only $10,000, rather than $410,000 (which would have been the case without the step-up in basis). If you sell the property immediately after inheriting it, you may avoid capital gains tax altogether.
Does This Mean Inherited Property Is Always Tax-Free?
While the step-up in basis provides significant tax advantages, it’s important to remember that tax laws can be complex. Factors such as estate taxes and holding periods may impact the final tax liability. Consulting with a tax professional is always recommended to ensure the proper handling of an inherited property.
Final Thoughts
The step-up in basis is a powerful tax tool that can make inheriting real estate far more manageable from a tax perspective. If you’ve inherited property or are considering estate planning strategies, understanding this provision can help you make informed decisions.
Have questions about how this might apply to you? Reach out to Rom for expert insights into real estate and tax strategies!
