Understanding Stepped-Up Basis: A silver lining when inheriting property

When a loved one dies, taxes are probably the last thing on your mind. However, there's an important tax benefit called "stepped-up basis" that can make a big difference for Idaho families who inherit property or other assets. Let’s try to understand this concept in simple terms because it might just save you or a loved one some real money down the road. 

Imagine your grandmother bought her Coeur d’Alene home in 1975 for $30,000. Over the years, that house has grown in value and is now worth $400,000. If your grandmother had sold the house just before her death, she would have owed capital gains tax on the difference between her purchase price (called the "basis") and the selling price, minus any qualifying improvements she made to the property. 

But here's where the stepped-up basis comes into play: if your grandmother’s estate planning was set up properly, and if her estate is administered the right way after her death, when you inherit that same house the property's basis is "stepped up" to its fair market value on the date of death. In our example, your new basis would be $400,000, not the original $30,000 your grandmother paid.  

Why does this matter? Let's say you decide to sell the inherited house a year later for $420,000. You would only owe capital gains tax on the $20,000 difference between your stepped-up basis ($400,000) and the selling price ($420,000). Without this tax benefit, you would have owed taxes on the entire difference between the original purchase price and the selling price — a whopping $390,000! 

This same principle can apply to other inherited assets that appreciate in value over time, such as: 

• Stocks and bonds 

• Family farms and ranches 

• Business ownership interests 

• Valuable collectibles  

The stepped-up basis provision has been part of our tax code for decades. It helps prevent families from facing heavy tax burdens on appreciation that occurred during a deceased relative's lifetime. This is especially important in places like Idaho, where family farms, cabins, and residential properties often pass down through generations and appreciate significantly in value. 

A few important points to remember: 

• The stepped-up basis applies to inherited assets, not gifts received during someone's lifetime 

• Multiple heirs sharing a property each receive the same stepped-up basis 

• Professional appraisals at the time of death can be necessary for establishing the new basis 

• Some assets, like retirement accounts and life insurance proceeds, follow different rules 

Some of the most frustrating situations I’ve seen as an estate planning attorney are ones in which tens or even hundreds of thousands of dollars in capital gains taxes must be paid but could have been avoided if better planning and or administration would have been used. An experienced estate planner can help you make informed choices to preserve the stepped-up basis benefit. There is no reason to throw away this powerful tool when some solid professional planning can ensure its availability.   

My law firm is currently offering free telephonic, electronic, or in-person consultations concerning creating or reviewing estate planning documents. 

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Robert J. Green is an Elder Law, Trust, Estate, & Guardianship Attorney and the owner of Kootenai Law Group, PLLC in Coeur d’Alene. If you have questions about estate planning, probates, wills, trusts, powers of attorney, guardianships, Medicaid planning, or VA Benefit planning, contact Kootenai Law at 208-765-6555, Info@KootenaiLaw.com, or visit www.KootenaiLaw.com.

This has been presented as general information and not as legal advice. Do not engage in legal decision-making without the advice of a competent attorney after discussion of your specific circumstances.