QUESTION:
What does STEP-UP IN BASIS mean?

ANSWER:
The income tax valuation ("basis") of inherited assets is the value on the date of death.

For example, if Uncle George leaves you a share of stock in XYZ, and the stock was selling for $250 per share at the time of George's death, that share is treated if you had purchased it for $250 whenever you eventually sell the stock.

George's actual cost of the stock is totally disregarded for all future purposes. If value has decreased, a step down in basis occurs.

Joint Tenancy Property gets HALF a Step Up in Basis If you and George had purchased that share of stock together, when it cost $50, your cost basis for your ½ share was $25, and George's cost basis for his ½ was $25. George dies and leaves you his ½ share. Only the portion inherited receives the step up in basis.

You now have your old ½ with a cost basis of $25, and George's ½ with a new basis of $125 (its value on the date of his death). Your total basis is $150. If you sell it right away for $250, your taxable profit is $100.

Community Property gets a "FULL Step Up in Basis" A special rule applies to Community Property. Regardless of which spouse dies first, the entire 100% of Community Property is revalued at the date of death of the first to die.

In our example, if you are married to George, and the stock is Community Property, the survivor's basis is $250 at the death of the first spouse, regardless of who first bought that stock.

Declining Value Assets: Step Down in Basis

If George bought IBM at 105 and it is now at 60, if you inherit that stock you take with it the date of death fair market value as your basis. Thus you cannot write off that loss from George's original cost. [In fact, George should have sold the stock before he died so he could write off the loss.] If the property is owned as Separate Property, at George's death it gets half a step down in basis; if it is held as Community Property, it gets a full step down.

See Community Property and Community Property with Right of Survivorship.

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