Hang onto That Asset

Have you heard of the “step-up basis” tax provision?

A “Step-Up” in basis is when the value of an asset (we will use a home of this example, but other assets like stocks, etc would apply) has the value bumped-up upon the death of the owner.

Using the house example, if I purchased a vacation home, my “basis” is what I purchased it for (plus improvements made). Let’s say I purchased it for $200,000 (I wish!). As it grows in value over time, when I go to sell down the road, I would have to pay capital gains tax on the difference between what I bought it for and what I sold it for - let’s say there is a $1M sales price. I am paying tax on $800,000.

Let’s say instead of selling it, I kept it until my passing. Then, all my beneficiaries who I passed the house to decided they wanted to sell it. Their basis in the house is not what I purchased it for ($200,000), it’s the FMV value of the asset at the time of my passing (you can also elect the FMV date on the 6-month anniversary of death if that’s more beneficial). So now when you go to sell it (assuming it’s shortly after my passing and the FMV doesn’t exceed the FMV at my time of death), you won’t owe a gain on the sale of the asset. Pretty cool right?

Where people mess this up - is when they transfer ownership of assets to their children (or others) when they’re still alive. When a transfer like that happens, the basis transfers with it. So instead of having a basis of $1M like you would upon their passing, you only have a basis of $200,000, and when you sell, will have to pay capital gains rates.

So - if there are assets you are planning on passing along to beneficiaries, hold them in your name until you are gone, so they can transfer to them in a tax-efficient manner.

Source: Mad Woman Media