The influence of step-up in cost basis on inheritance

On Behalf of | Apr 3, 2019 | Blog

People inheriting various assets in Nevada could enjoy certain tax advantages due to the concept known as step-up in cost basis. This term refers to an asset’s increase in value while someone possesses it. A person who buys a stock for $2 a share and then sells it while still alive for $10 a share would owe capital gains taxes on the $8 per share increase in value.

The same stock purchase and sale could have very different taxation if the original owner bequeathed the stock to someone and the heir then sold it for $10 per share. Although each share increased in value by $8, the heir owes no capital gains taxes because that person did not experience a step-up in cost. The heir received a share valued at $10 and sold it for that amount. An heir who holds onto the stock and sells it later for $11 a share would, however, owe tax on the $1 because that person experienced the increase in value.

Heirs can benefit from stepping up on real estate assets too. Rental and commercial properties can also increase in value during a benefactor’s lifetime before they are bequeathed to an heir. The original owner while alive might have made tax write-offs for depreciation while fixing up the property. Upon selling a property, the owner must pay depreciation recapture taxes. A property transferred to an heir would not impose any depreciation recapture taxes on the new owner because the depreciation write-offs belonged to the previous owner.

Knowledge of estate and tax law might help a person plan suitable strategies for reducing or eliminating tax burdens on heirs. An attorney may be able to provide a personalized legal analysis of a person’s assets and recommend approaches to will planning that might achieve the client’s goals.