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February 24, 2024 | read

Avoid Estate Taxes with the Stepped Up Basis Rules

Brandon Hall

Avoid Estate Taxes with the Stepped Up Basis Rules

One of the huge benefits of real estate is that you can literally avoid taxes on the appreciation of your assets over time.

If you hold your real estate assets until death, your heirs will receive a stepped-up basis equal to the greater of the fair market value or adjusted basis of the asset at the time of death.

If you bought a property for $100,000 and passed away 10 years later when the property was worth $250,000, your heirs would receive the property with a basis equal to the fair market value, or $250,000. This means your heirs can then sell the property for $250,000 and pay zero capital gain taxes!

A word of caution: while the stepped-up basis rules can save literally tens of thousands of dollars in taxes, if you structure your purchases incorrectly, you can blow the whole thing up.

Do not put your child’s name on the property. Be careful with entity structuring, especially when using trusts. A wrong move can hurt the family wealth you are creating.

As an example, let’s say you buy a property for $100,000 and put your child’s name on the property as a joint owner. In theory, you now have a basis of $50,000 and your child also has a basis of $50,000.

Let’s say the property value increases to $250,000 when you pass away. Your child is only going to get a stepped-up basis on your half of the asset. The child’s unadjusted basis w, therefore,fore be their original $50,000 basis plus your stepped up basis on your half, or $125,000, for a total basis of $175,000.

If the child were to turn around and sell the asset for $250,000, they would realize a $75,000 capital gain and at a 15% tax rate they’d owe the IRS $11,250!

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