Understanding the ‘Step-Up in Basis’ When Selling Inherited Assets: Insights from Minnesota Estate Planning Attorney

Nov 14, 2023 | Minnesota Estate Planning

Inheriting an asset can be a mixed blessing. While it might signify a meaningful bequest from a loved one, it also comes with its own tax implications. One of the most significant tax features to understand when inheriting property is the “step-up in basis”. As a Minnesota estate planning attorney, I often encounter clients who are unaware or confused about how this works. Let’s break it down in simple terms.

What is ‘Basis’?

Firstly, it’s important to define what “basis” means. In tax lingo, the basis of a property is essentially its original value for tax purposes, typically the purchase price. When you sell an asset, the capital gains tax you owe is calculated on the difference between the selling price and this basis.

Step-Up in Basis: A Definition

A “step-up in basis” means that the basis of an inherited property is revalued or “stepped up” to its market value at the date of the decedent’s death. 

For example, imagine your grandmother bought a house for $50,000 decades ago. At the time of her passing, the house is worth $500,000. If you inherit this house and decide to sell it immediately for $500,000, the step-up in basis would mean that your basis for the house is $500,000, not the original $50,000. Therefore, you wouldn’t owe any capital gains tax on the sale.

Benefits of Step-Up in Basis

  1. Minimized Tax Liability: The most apparent benefit is the potential reduction in capital gains tax when selling an inherited asset. This is especially beneficial for assets that have appreciated considerably over time.
  2. Simplicity in Record-Keeping: For older assets, it might be challenging to determine the original purchase price. The step-up in basis provides clarity and eases the process of selling inherited property. 

Considerations & Limitations

It’s important to note that while the step-up in basis can provide tax advantages, it doesn’t apply to all inherited assets or situations. There might be other factors, such as state-specific inheritance taxes or rules, which impact the overall tax picture.

Contact Our Minnesota Estate Planning Attorney

The intricacies of inheriting and selling assets, along with understanding tax implications like the step-up in basis, require expert guidance. Our Minnesota estate planning attorney is equipped to provide you with personalized advice tailored to your unique situation.

If the world of inherited assets, basis, and tax implications seems daunting, we’re here to help. Reach out to us today at 763-244-2949 for a consultation and be sure to mention this article for a comprehensive discussion.