The IRS describes Basis as “generally the amount of your capital investment in property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange, or other disposition of the property. In most situations, the basis of an asset is its cost to you. The cost is the amount you pay for it in cash, debt obligations, and other property or services.”
If you leave assets to beneficiaries when you die, the basis of the assets you purchased are stepped up. Your beneficiaries take the asset at the new basis of the fair market value of the asset at the time of your death.
If you buy a house for $200,000 and you die in 2025 when the house is worth $450,000, your child gets a step-up basis at your death. Your child’s basis in this example would be $450,000. This means that your child can sell the house for $450,000 and she will not have a capital gain.
If you give (deed) your house to your daughter while you are living, the basis your daughter receives in the house is different. Your daughter would not receive a step-up in basis and when she sells the house, she will have to pay the difference in the sale price of the house and your original basis (your original purchase price) to determine her capital gain. This is because gifts made during your lifetime to retain the basis of the property from when you purchased the property.
Because step-up basis only applies to gifts you make after death, it is often better to give your assets to your loved ones in death, via an inheritance, rather than in life if you are planning with the goal of reducing taxes and maximizing the value of your assets for your beneficiaries.
To learn more about the best ways to leave an intentional legacy for your loved ones, contact Crain & Wooley today.