What Does Step-Up in Basis Mean? A Bay Area Estate Lawyer Explains

As a Bay Area estate lawyer, I often find that clients are unfamiliar with the concept of “step-up in basis” until they’re facing significant tax implications after an inheritance. This powerful tax provision can save your heirs thousands—or even millions—of dollars, yet it remains one of the most misunderstood aspects of estate planning.

The Basics of Basis

To understand step-up in basis, we first need to clarify what “basis” means in tax terms. Your basis in an asset is essentially what you paid for it, plus certain adjustments. When you sell an asset, you pay capital gains tax on the difference between your basis and the sale price.

For example, if you purchased shares of stock for $10,000 (your basis) and later sell them for $50,000, you would owe capital gains tax on the $40,000 profit.

What Is Step-Up in Basis?

Step-up in basis refers to the adjustment of an asset’s tax basis to its fair market value at the time of the owner’s death. In simple terms, when you inherit certain assets, your basis in those assets “steps up” from what the deceased originally paid to what they were worth when they died.

This provision can dramatically reduce or even eliminate capital gains taxes for heirs.

How Step-Up in Basis Works: A Practical Example

Let’s consider a real-world scenario I encountered as a Bay Area estate lawyer:

A client’s mother purchased a home in the Bay Area for $50,000 in 1975. By the time she passed away in 2023, the home was worth $1,200,000. Without the step-up in basis, if the daughter sold the home, she would owe capital gains tax on $1,150,000 ($1,200,000 minus the original $50,000 basis).

However, thanks to the step-up in basis, the daughter’s basis in the home became $1,200,000—the fair market value at her mother’s death. When she sold the property shortly after for $1,300,000, she only paid capital gains tax on $100,000 instead of $1,150,000, saving her almost $250,000 in federal capital gains taxes alone.

Which Assets Qualify for Step-Up in Basis?

Not all inherited assets receive this beneficial tax treatment. Assets that typically qualify include:

• Real estate
• Stocks, bonds, and mutual funds (outside of retirement accounts)
• Businesses
• Valuable collectibles and personal property

Assets that generally don’t receive step-up in basis include:

• Tax-deferred retirement accounts (IRAs, 401(k)s)
• Annuities
• Assets gifted during the original owner’s lifetime

Recent Legislative Considerations

The step-up in basis provision has periodically been targeted for reform by various administrations. Working with a knowledgeable Bay Area estate lawyer ensures your plan remains current with existing tax laws and can adapt to potential changes.

The Value of Professional Guidance

Understanding how step-up in basis affects your specific situation requires personalized advice. Each family’s financial situation is unique, and tax laws continue to evolve. An experienced Bay Area estate lawyer can help you navigate these complexities and develop strategies that maximize tax benefits for your heirs.

Don’t leave your hard-earned legacy vulnerable to unnecessary taxation. Contact our office today at 408-889-1290 to discuss how we can help you incorporate step-up in basis planning into your comprehensive estate strategy.