What is a step up in basis?
A step up – or step down – in basis is an adjustment for tax purposes to an asset’s fair market value at the date of the death of the owner of the asset. For example if you bought a share of stock for $100 that increased in value to $500 at the time of your death, your tax basis was $100, but increases to $500 at the time of death. This increase is known as a step up in basis. If you bought the stock for $500 and it was worth $100 at the time of your death, it would be a step down in basis. In community property states, each spouse’s share of community property receives the adjustment.
Your basis in an asset is what you paid for the asset at the time you bought it. A step up in basis is the fair market value of the asset at the date of death. This theory can best be illustrated in the following example: If you bought a parcel of land in 1960 for $5,000 and have it in joint ownership with your beneficiary and you die, your beneficiary will have a basis in the property of $5,000. If your beneficiary sells the property for $100,000, a $95,000 capital gain will be taxed, (the difference between $100,000 and $5,000). Your beneficiary will have to pay income tax on this increase in value. Compare this to putting this same parcel of land in a living trust. When you die, your beneficiary will get a step up in the basis to $100,000 rather than the $5,000 basis that you had. The step up in basis is the fair market value of the asset on the date of your death. Thus, if your beneficiary were to sell the property for $100,000, there would be no capital gain to be taxed because of
