Common mistakes with stepped-up basis include gifting appreciated assets before death (triggering capital gains instead of a, Berg Bryant Elder Law Group, PLLC), improperly holding property in joint tenancy instead of community property (limiting the, Financial Alternatives), and failing to document accurate fair market values at the time of death. Other errors involve trying to step up assets that do not qualify, such as IRAs or 401(k)s.
While inherited assets typically receive a step-up in basis (which can reduce or eliminate capital gains tax upon sale), improper titling, gifting during life, or incorrect trust setup could forfeit that benefit.
The Step-Up in Basis loophole is used to circumvent capital gains taxes, or to pay the least amount of this type of inheritance tax as is legally possible. This loophole can be used on inherited assets that have appreciated in value from the time they were purchased.
For inheritances, the basis is the fair market value of the asset at the time of the donor's death (or six months afterward, if the executor elects the alternative valuation date). This is the stepped-up basis).
Assets that do not receive a step-up in basis when they pass to a beneficiary include:
The most tax-efficient way to leave a home to a child usually involves leaving it in your will for them to inherit, which qualifies for a stepped-up tax basis (reducing capital gains tax if sold) and avoids immediate gift taxes, though trusts (like Revocable Living Trusts for probate avoidance or QPRTs for advanced planning) or Transfer-on-Death (TOD) deeds (where available) offer control and probate avoidance, while outright gifting is generally less tax-efficient due to inherited basis issues. Consulting an estate planning attorney is crucial to choose the best method for your specific situation.
As mentioned, if the inherited property was the deceased's principal residence, selling it within two years of their death can result in a full CGT exemption. This is one of the simplest and most effective ways to avoid paying CGT.
Having an appraisal done at the time real estate property is inherited establishes the new or stepped-up basis. For other investment assets, keeping documents, and published market data would assist in establishing a current market value. If a taxpayer cannot prove the basis, the IRS has the right to say it was zero.
On a $100,000 capital gain, you'll likely pay 15% for long-term gains, resulting in about $15,000 in federal tax (plus potential state tax), but it could be 0% or 20% depending on your total taxable income and filing status, while short-term gains are taxed as ordinary income (potentially 22-24%).
Do assets owned in a trust receive a step-up in basis? Yes and no. If the asset was held in a revocable (or living) trust before the owner died, it will likely be eligible for a step-up in cost basis. Financial accounts aren't the only assets that can be held in trust.
When inheriting any asset, Canada's tax system uses a “stepped-up basis”. This means the asset's value for tax purposes is set at its value on the day you inherited it, not what it was originally worth.
A step up in basis is an adjustment of the value of an inherited asset to its fair market value at the date of the original owner's death. This adjustment often significantly decreases, or even eliminates, the capital gains tax that a beneficiary would owe should the beneficiary choose to sell the inherited asset.
Is Form 706 Required for a Step Up in Basis? Form 706 is not required to receive a step up in basis on inherited property. A step up in basis is automatic at the time of inheritance. Even if the property isn't sold, taxes may still be owed.
You can avoid capital gains taxes on inherited property by minimizing the time for appreciation. Selling immediately after inheritance typically results in minimal capital gains tax because there's little time for the property to appreciate beyond its stepped-up basis.
However, if you inherited the stock due to the death of a parent, the securities typically receive a “step up in basis.” That means your capital gain or loss will be based on the fair market value at the time of death, not the time of original purchase.
Generally, you must keep all required records and supporting documents for a period of six years from the end of the last tax year they relate to.
You can typically inherit a very large amount from your parents without paying federal tax, as the federal estate tax exemption is around $15 million per person for 2026, meaning only estates larger than that pay tax, not you directly. While you generally don't pay income tax on inheritances (except for pre-tax retirement funds like IRAs/401(k)s, which are taxed as income when withdrawn), some states have their own estate or inheritance taxes with much lower thresholds, affecting a smaller portion of wealth.
Some types of assets that Step-Up in basis cannot be applied to include:
The step up in basis is particularly valuable for families looking to reduce capital gains taxes on appreciated assets like real estate, stocks, or valuable collectibles. However, this does not necessarily eliminate estate tax obligations if the estate is large enough to exceed the federal or state exemption limits.
After someone dies, their estate (money, possessions and property) is left to an executor named in their will. The executor is legally responsible for taking care of their estate, which will likely include paying any taxes that are owed, including Capital Gains Tax.
The bottom line is that if you inherit property and later sell it, you pay capital gains tax in an amount based only on the value of the property as of the date of death. Example: Jean inherits a house from her father George. He paid $100,000 for it over 20 years ago.
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