STEPPED-UP BASIS

Summary

Stepped-up basis is a tax provision that adjusts the cost basis of an inherited asset to its fair market value on the date the original owner died. This means heirs receive the asset with a 'stepped-up' basis equal to its current market value, rather than what the deceased originally paid for it. This adjustment can significantly reduce capital gains taxes when the heir eventually sells the asset, as they only pay taxes on gains above the stepped-up value rather than the original purchase price.

Usage Context

Essential for understanding estate planning strategies, inheritance tax implications, and investment decision-making for both estate owners and beneficiaries. Critical when analyzing whether to hold or sell inherited assets.

Common Confusions

• Thinking stepped-up basis applies to gifts received during someone's lifetime (it doesn't - that's carryover basis)
• Assuming all inherited property gets stepped-up basis regardless of type
• Confusing stepped-up basis with estate tax exemptions
• Not understanding that basis can step down if asset value decreased
• Mixing up the date of death valuation with when the asset is actually distributed