What is Step-Up Basis?

Step-up (or Stepped-Up) basis is a tax term used to describe the adjustment of the cost basis of an asset for tax purposes upon the transfer of ownership. In the context of real estate, it refers to the increase in the value of a property that is attributed to the owner for tax purposes when the property is transferred to a new owner, such as through inheritance or sale.

Here's how it works:

• The cost basis of a property is typically the purchase price plus any capital improvements made to the property.
• When the property is transferred to a new owner, the new owner's cost basis is typically equal to the fair market value of the property at the time of transfer.
• This new cost basis is called the "stepped-up" basis.

The stepped-up basis can result in a lower tax liability for the new owner when they eventually sell the property, since the capital gains tax is based on the difference between the sale price and the cost basis. If the property has increased in value since the previous owner acquired it, the new owner's stepped-up basis will be higher, resulting in a lower capital gains tax when the property is sold.

It's important to note that step-up basis only applies to inherited property, and not to property purchased from another individual. Additionally, the rules regarding step-up basis can vary depending on the jurisdiction and the specific circumstances, so it's best to consult with a tax professional for specific advice.