What Does 'Stepped-Up Basis' Mean?
Stepped-up basis refers to the adjustment of the tax basis of an inherited asset to its fair market value at the time of the owner's death. This adjustment is important for determining capital gains tax liability when the beneficiary decides to sell the inherited asset.
Under normal circumstances, when an individual sells an asset, they are required to pay capital gains tax on the difference between the sale price and the original purchase price (the basis). However, with stepped-up basis, the tax basis is "stepped up" to the fair market value of the asset at the time of the original owner's death. This means that the beneficiary's capital gains tax is calculated based on the appreciated value from the date of inheritance, rather than the original purchase price.
The concept of stepped-up basis is particularly significant for heirs, as it can result in substantial tax savings. By resetting the basis to the asset's value at the time of inheritance, any appreciation that occurred during the original owner's lifetime is effectively excluded from the capital gains tax calculation when the heir sells the asset.
This tax provision is often utilized in estate planning strategies to minimize the tax burden on heirs. However, it's essential to note that the rules surrounding stepped-up basis can vary, and tax laws are subject to change. It's advisable for individuals engaged in estate planning or dealing with inherited assets to seek professional advice to ensure compliance with current tax regulations.
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