Those that inherit land (or their agents) many not be privy to this tax provision that helps to mitigate capital gains taxes when they choose to sell. But, a Step-Up in Basis can save thousands on inherited property – learn how:
If you’re working with a family that just inherited some land or a piece of real estate or if you just did yourself, you may have heard of what’s called a step-up in basis. So, a step up and basis is a tax provision that allows the basis of the property for tax purposes to be adjusted to the fair market value at the time of the original owner’s death, rather than the basis of what they paid for it when they purchased the property. So, this can be a tremendous tool to help save on capital gains taxes if the heirs ever go to sell the property.
So, how it works, for example, let’s say a father or a mother purchased a piece of land for five hundred thousand dollars. When they pass away, their heirs, their children, inherit that property. The fair market value of that property we could say is a million dollars, so their adjusted basis would actually go up to a million dollars. So, if they were to sell the property six months down the road for 1.2 million, they would only have to pay capital gains tax for two hundred thousand dollars in value because the difference of 1 million to 1.2 million, as opposed to paying the difference of five hundred thousand dollars, which is what their parents paid for it and the sales price of 1.2 million. Now, they don’t have to pay capital gains tax until they actually sell the property. However, they may be subjected to estate tax.
So, it all depends on how many assets they get and for example. So, always, always work with a qualified CPA. I say this in every video, as well as, a good real estate attorney. But, this can be a tremendous tool because it helps to, you know, not eliminate taxes, but to mitigate taxes as much as possible. And, then you can also do 1031 deferred exchanges, which we’ve discussed as well. But, this can be a great tool.
And, especially if you’re working with a family. Of course, you know going through the death of a loved one is never easy, so if they’re trying to dispose of the assets, you know, as a real estate agent or broker you cannot legally practice law, but you can guide them to a qualified CPA or real estate attorney. But, you will be considered an expert if you can talk to this intelligently, because we’ve been surprised how many families don’t know about this. So, it’s called a step-up in tax basis and it can be extremely beneficial in mitigating capital gains tax as much as possible.
Feel free to reach out to us with questions or other topics you’d like to see covered.
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