Step-Up In Basis

April 5, 20222 min read
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The Step-up In Basis is oftentimes considered a tax loophole for investors and corporations. The Step-Up In Basis or Stepped Up Basis is a method used to help bypass capital gains taxes for assets that are passed on.

In short, the Stepped Up Basis loophole helps to adjust the tax value of an asset that has appreciated in value over time. This helps to ensure that there are fewer capital gains taxes that are to be paid on the asset than its value at the time of the sale.

How does the step-up in basis work?

The step-up in basis takes into consideration when and how a person decides to pass on any asset or form of wealth. This could either be before, or after someone has passed away, and wealth assets are then given over to the next of kin or heirs of the will.

Let’s say, for example, your parents purchased a house in the early 1990s at $150,000. During this time, they have maintained the house, and kept it in perfect condition. After the recent passing of a parent, the other decides to hand it over to you and relocate to somewhere smaller.

The house is now perhaps worth $350,000 based on inflation, and the appreciated value of the house makes the fair market value $400,000. After you’ve received the house, you then decide to sell it on the market for $550,000, meaning the profit on the sale is $400,000 if not adjusted for inflation or the current market value.

After the stepped up basis loophole, it could mean that profits on the sale could be significantly lower, anything between $50,000 and $100,000 which is then considered as capital gains taxes.

Consider how the step-up in basis is a way to lower the amount of capital gains taxes owed, on real estate, investments, stocks, and shares.