The tax incentive for a step-up basis is a vital estate planning tool because it allows property owners to leave the assets they own to their children on the “stepped-up” basis based on current value, not the amount they initially purchased the property for.
This is especially relevant in the case of assets that have earned substantial value from growth over time, such as the duplex or any other multi-family or commercial real estate properties.
But not all assets bequeathed are treated equally with respect to the IRS. We’ll discuss what assets qualify for a boost if you pass them on to your heirs after your passing.
Which Assets Qualify For An Increased Basis?
Any property you have left to your heirs can be eligible for an increase in basis on the passing. The assets that are eligible for this include types of property:
- Multi-family apartment complexes, duplexes, triplexes, and multiplexes
- Garden, medical, and other office types
- Strip and stand-alone retail centers
- Self-storage and industrial facilities
- Residential rental properties
- Hotels with a hospitality component
These assets are stepped up only when the assets are transferred following the owner’s death. Assets gifted before the owner’s death are assigned according to the original cost basis.
Other assets that could be eligible to receive a basis increase are:
- ETFs, stocks, bonds, and mutual funds
- Equipment and businesses
- Assets that are not retirement-related, such as brokerage accounts
- Art, antiques, and collectibles
Additionally, the assets that are held in certain types of trusts may be increased based on the method by which the trust was established. A common rule is that assets held in a living or revocable trust can be qualified for a step-up basis. However, the irrevocable trusts probably aren’t. However, it’s advisable to talk to experienced tax, financial, estate, and tax planners to avoid confusion about what assets qualify for a higher basis after the owner’s death.
Assets That Aren’t Eligible For A Step-Up In Basis
Various financial tools are commonly used to build and protect the wealth that isn’t eligible for an upgrade on a base. They include:
- Retirement accounts like IRAs and 401(k)s
- Pension plans
- Money market accounts
- Annuities with tax-deferred payment
- Certificates of Deposit
Tools for building wealth like IRAs and companies’ 401(k)s are used so extensively that you must make any necessary changes to the estate planning before dying to be sure the most significant amount of money in these types of accounts will be passed on correctly to your descendants. Be aware that, using IRAs and 401(k)s, you already received an income tax deduction for contributing to them. The money was also tax-free, meaning your heirs will not receive any tax advantages if the accounts remain untapped after you pass away.
The Bottom Line
The step-up in basis is among the most effective methods to benefit from the current tax policies to protect and transfer wealth to your heirs as it will reduce taxes on capital gains on specific inherited assets. But it is not the case that all assets can be eligible for this kind of taxation, specifically those held as an irrevocable trust.
If you plan to inherit one of these assets described above via inheritance, consult your tax and financial advisors to decide the assets that are eligible for a higher basis. When planning your estate, discuss with qualified experts the assets you intend to leave to your heirs with an increased motivation so that they don’t have any tax liability for capital gains.