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

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

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Written by Troy Werner

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POSTED ON: July 29, 2023

The “step-up” in basis has to do with the calculation of the capital gains on the sale of property.

There are a lot of confusing tax terms out there. One term in particular, though, is extremely important to know about. So, what is a 'Step-Up' in Basis in Estate Planning? 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 an experienced estate planning attorney in California to draft an irrevocable trust for estate inclusion and consequently a step-up in basis if that’s your goal.

An experienced estate planning attorney can help make the whole process an easy one.

If you have any questions about living trusts, schedule a free appointment with us through our online appointment page. We would be happy to see how we can help.

You can also read reviews from some of the hundreds of clients we have helped over the years.

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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