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What Is a ‘Step-Up’ in Basis in Estate Planning?

What’s the Best Way to Pass the Family Home to Heirs?
The “step-up” in basis has to do with the calculation of the capital gains on the sale of property.

Have you heard the term, “step-up in basis” in estate planning? This is just one of many reasons why having an experienced estate planning attorney like the ones at Beck, Lenox & Stolzer Estate Planning and Elder Law, LLC, is important to engage when creating an estate plan. You want to have the best possible advice when leaving a legacy for your family.

So , what is a step-up in basis in estate planning? A step-up in basis for estate planning concerns possible capital gains on property you own. To illustrate, let’s say that you have a condominium in New York that’s currently being rented out, and you retired to Florida. You plan to sell the apartment within the next year or two, which is in your name, not your trust. However, the question arises if you didn’t sell it and put it in trust, would the condo get the stepped-up basis if it were sold after we pass away, asks Market Watch’s recent article entitled, “Will our condo get a step-up in basis if we put it in trust?”

The answer is yes for revocable trusts and most irrevocable trusts.

Trusts can be beneficial for out-of-state property to avoid two probate processes upon the death of the owners, one in their state of residence and one where the out-of-state property is located. These are usually revocable trusts. Irrevocable trusts may be used for other purposes, such as asset protection.

The “step-up” in basis concerns the calculation of the capital gains on the sale of property. The capital gain is the difference between net proceeds on sale and the basis. The initial basis is the purchase price of the property. The cost of any improvements may be added to it.

So, for instance, if you paid $500,000 for your condominium and spent $100,000 replacing the kitchen, the basis would be $600,000. If you sold the apartment for $1 million, your capital gain would be $400,000.

The step-up in basis is another adjustment that occurs when an owner dies. At that time, the basis is adjusted to the date-of-death fair market value of the property. This is commonly called a “step-up” in basis because real-estate values typically increase over time, so the new basis is typically higher than the old one.

In the example, if the condo had a market value of $1 million upon the death of the owner, that would become the new basis. If the property were sold, any capital gain would be only an increase in value after death.

To receive a step-up in basis on a property upon the death of the owner, it must be in their taxable estate. All property in a revocable trust created by the decedent is in their taxable estate.

Whether an irrevocable trust is in the decedent’s taxable estate depends on how it’s drafted. Ask one of the experienced estate planning attorneys with Beck, Lenox & Stolzer to draft an irrevocable trust for estate inclusion and consequently, a step-up in basis if that’s your goal. Click here to schedule a free phone consultation.

Reference: Market Watch (April 7, 2023) “Will our condo get a step-up in basis if we put it in trust?”

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