That means the carryover basis is $375 for all five stocks. stock when it was priced at $75 per share. Let’s say Robert gifted Jennifer five shares of XYZ Co. This is known as a “carryover basis.” Under this basis, capital gains on a gifted asset are calculated using the asset’s purchase price. If someone gives a gift to somebody during their lifetime, the recipient retains the basis of the person who made the gift, says the Tax Policy Center. Assets Included Under Step-Up in BasisĪssets that may fall under the step-up provision include:Īmong the assets that aren’t affected by the step-up rule are retirement accounts-including 401(k)s, IRAs and pensions-and most assets in an irrevocable trust. Without the step-up in basis, Jennifer would end up paying capital gains taxes on the $40-per-share difference between the price Robert paid for the stock ($50 a share) and the sale price ($90 per share). Thanks to the step-up in basis, Jennifer would pay capital gains taxes solely on the $20-per-share difference between when she inherited the stock ($70 per share) and when she sold it ($90 per share). When Jennifer decides to sell the shares five years after inheriting them, the stock’s price sits at $90. At that point, the stock’s price has climbed to $70 a share. Jennifer inherits the stock after Robert’s death. Let’s say Robert purchased 200 shares of XYZ Co. “If the heir chooses to sell the asset, any tax would be assessed on the new basis, meaning only appreciation after the asset had been inherited would face capital gains tax.” Example of Step-Up in Basis If these assets are never sold, they are never subject to capital gains taxes,” the Tax Foundation explains. “Some assets are held for generations and passed from their original owners to heirs. This means there’s a “step-up” from the original value to the current market value. A capital gain happens when you sell an asset for more than what it initially cost.Ī step-up in basis takes into consideration the fair market value of an asset when it was inherited rather than when it was acquired. If someone sells an inherited asset, a step-up in basis may shield them from higher capital gains taxes. In this way, the heir might see a reduction in the amount of capital gains tax they wind up paying on the inherited asset.įor some families, this provision allows them to avoid paying what would be a normal share in capital gains taxes by passing assets down through generations. This aspect of the tax code changes the cost basis-or value-of an asset, such as stocks or property, that someone inherits from a person who has died. Step-up in basis, also known as stepped-up basis, is a wrinkle in the federal tax code that can help heirs avoid or reduce taxes on inherited assets. Inherited assets don’t have to incur added fees.
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