When a loved one passes down real estate, the emotional weight can be heavy—and so can the potential tax bill. For families inheriting property, understanding how taxes work on that transfer is critical. One key rule, often misunderstood or overlooked, is the stepped-up basis. This provision can significantly reduce capital gains taxes for heirs, preserving more of the property’s value. Whether you’re planning your estate or preparing to inherit, knowing how the stepped-up basis works is an important part of protecting your financial future.
What is the Stepped-Up Basis?
The stepped-up basis is a tax rule that adjusts the value of an inherited asset—like real estate—to its fair market value at the time of the original owner’s death. This new value becomes the heir’s cost basis, or starting point, for calculating capital gains when the property is eventually sold.
Here’s what that looks like in practice:
If someone bought a home decades ago for $100,000, and it’s worth $500,000 at the time of their death, the cost basis “steps up” to $500,000 for the person inheriting it. If that heir later sells the property for $550,000, they’re only taxed on the $50,000 in gains, not the $400,000 increase that happened during the original owner’s lifetime.
This provision can result in substantial tax savings, especially in today’s real estate market, where long-term appreciation is common.
How the Stepped-Up Basis Works and Why it Matters
The stepped-up basis can make a big difference in how inherited real estate is handled, especially when it comes to timing and tax planning. While the concept seems relatively simple, the details around valuation, documentation, and sale strategy deserve a closer look.
Key Points to Understand:
- Valuation Date: The IRS allows executors to choose the property’s value on the date of death or six months later—whichever results in a lower tax burden.
- Capital Gains Implications: Only the appreciation that occurs after the property is inherited is taxable. Gains from the original owner’s lifetime are effectively wiped out.
- Applies to Inherited, Not Gifted, Property: The stepped-up basis does not apply to real estate that’s gifted during the owner’s lifetime. In those cases, the original basis carries over, which can result in a much higher tax bill.
- Get the Value Documented: An official appraisal or third-party valuation at the time of death is essential. Without it, it’s difficult to prove the new basis if the property is later sold.
- Occasional Step-Downs in Value: If a property’s market value has dropped below its original purchase price at the time of death, the basis can actually decrease—known as a “stepped-down” basis. While this is less common, it can happen, and may limit the ability to claim a capital loss later.
Understanding these details can make a big difference when it comes time to sell. For many heirs, the stepped-up basis turns what could have been a significant tax liability into a much more manageable outcome.
Real Estate Tax Strategy Requires Real Expertise
Navigating the stepped-up basis isn’t just about understanding how the rule works—it’s about applying it correctly and making smart, informed decisions based on your specific situation. Missteps around timing, valuation, or recordkeeping can lead to higher taxes or complications when it’s time to sell.
That’s why it’s so important to work with an accounting team that knows real estate inside and out. The Hechtman Group has deep experience guiding clients through complex tax scenarios involving inherited properties. From estate planning considerations to real-world transaction support, we bring clarity to the details that matter most.
If you’re planning to pass down real estate—or you’ve recently inherited property—connect with us to make sure you’re getting the full benefit of what the stepped-up basis can offer.