What happens if you don’t sell the appreciated asset?

A beneficiary or heir automatically receives the stepped-up cash basis even if they choose not to sell an inherited property. They won’t pay capital gains taxes as long as they own the asset.nnThe asset can be passed down over generations, receiving a step-up in basis with each inheritance. This is a great way to build generational wealth without leaving your descendants a large tax bill on the assets they inherit.

Are primary residences exempt from capital gains taxes?

Primary residences are exempt from capital gains tax up to a specific amount based on your tax filing status. Individual taxpayers are exempt up to $250,000, and joint taxpayers are exempt up to $500,000. Any capital gains above these caps are subject to taxation.nnFor example, if you buy a home as a single adult for $150,000 and it appreciates to $400,000 in 15 years, the capital gains are $250,000. If you sell the house for $400,000, you may be exempt from paying the capital gains tax.

Is step-up in basis a tax loophole?

The tax provision isn’t technically a loophole, though it’s been criticized for disproportionately benefiting wealthy families and exacerbating the wealth gap. Supporters contest that the step-up in basis prevents double taxation and encourages Americans to save money and appreciate assets.

What assets don’t get a step-up in basis at death?

Untaxed income, retirement savings and interest-bearing accounts aren’t eligible for a step-up in basis, including:nn401(k) accounts.nIRAs.nPensionsnTax-deferred annuities.nCertificates of deposit.nMoney market accounts.nGifts transferred prior to death that are not inherited are also ineligible for a step-up in basis.

How does a step-up in basis work with trusts?

Revocable and living trusts allow the grantor (the trust owner) to control the trust until the trust’s terms are fulfilled. Then, the property goes to the beneficiaries after the grantor’s death. Step-up in basis typically operates the same way for a trust – an heir inherits an asset at its fair market value on the date of a grantor’s death. However, a step-up in basis may work differently with irrevocable trusts. The method will depend on the structure and type of trust. For example, grantor trusts have different guidelines than non-grantor trusts.nnBefore establishing a trust, speak with a financial advisor and estate planning attorney to guide you through the ins and outs of the process. Partnering with professionals can help ensure your trust fulfills your wishes and abides by federal and state laws.

Step-Up In Basis: How Does It Work?