When you inherit real estate and then subsequently sell that real estate, you will likely benefit dramatically from the step-up in basis, aka the step-up in basis or the stepped up basis.
There are important tax considerations and a professional advisor may be warranted.
The step-up in basis, what does this mean? If a child or grandchild later sells a gifted or inherited home, they may have to pay capital gains taxes depending on a variety of factors. If a property is inherited, there is a “step-up” in basis of the value of the property (to the value at the time of death) for purposes of calculating capital gains when the property is later sold. The “step-up” essentially provides a higher value of the property when calculating any “gains” as compared to the sales price. The “step-up” can have enormous tax benefits for the heirs that will be lost by gifting property during lifetime.
Gifting Example 1 – Without a Step-Up In Basis
For example, a property was purchased by a parent or grandparent for $1,000,000 and, at the time of their gifting the property, was worth $3,000,000. Five years later, the property is now worth $4,000,000 and the child or grandchild who was gifted the property sells the property for $4,000,000.
There will be capital gains on $3,000,000 of “gains”, i.e. the sale price minus the original purchase price ($4,000,000 [sale price] – $1,000,000 [purchase price] = $3,000,000 [“gains”]).
Inheritance Example 1 – With a Step-Up In Basis
For example, the same property was purchased by a parent or grandparent for $1,000,000 and, at the time of their death, was worth $3,000,000. Five years later, the property is now worth $4,000,000 and the child or grandchild who was gifted the property sells the property for $4,000,000.
There will be capital gains on only the $1,000,000 of “gains”, i.e. the sale price minus the value of the property at the time of death, not based upon the original purchase price. ($4,000,000 [sale price] – $3,000,000 [value at time of death] = $1,000,000 [“gains”]).
This is the “step up in basis.”
Under this example, gifting of the property will cause the child or grandchild to pay tax on an additional $2,000,000 of capital gains.
See the official IRS publication here:
Author Devin R. Lucas is a Real Estate Attorney, Real Estate Broker and REALTOR®, specializing in Newport Beach, Costa Mesa and Orange County, serving individuals, investors and Trustees in real estate.
Lucas Real Estate – REALTOR® and Attorney Devin Lucas and REALTOR® and CPA Courtney Lucas – are experts in California Real Estate Tax Considerations
Questions? – Paid one-hour confidential legal consultations are conducted daily via Zoom and address virtually all questions, options, tax implications and strategies. (Book a consultation here.).
Lucas Real Estate
REALTORS® and related Real Estate Law & Tax Considerations
Lucas Real Estate is a unique full-service residential real estate brokerage providing related residential real estate legal services and real estate tax considerations and planning, based in Newport Beach, California. | Devin Lucas is a licensed California Real Estate Attorney, Real Estate Broker and REALTOR® | Courtney Lucas is a California licensed CPA and REALTOR®
Check out our countless 5-star reviews and follow us on social media:
lucas-real-estate.com | email@example.com
2901 West Coast Highway Suite 200
Newport Beach | California | 92663-4023
Photo by kelly sikkema, unsplash
—-Disclaimer —- The content on this blog is for informational purposes only. Nothing on this blog should be construed to be legal advice, and you should not act or refrain from acting on the basis of any content on this blog without seeking appropriate legal advice regarding your particular situation, from an attorney licensed to practice law in your state. The content on this blog is not guaranteed to be correct, complete, or up to date. Devin R. Lucas’ office is in Newport Beach, California and is only licensed to practice law in California. Please be advised that Devin R. Lucas only provides legal services or advice pursuant to a written legal services agreement. The content on this blog is not intended to, and does not, create an attorney-client relationship between you and Devin R. Lucas, nor does our receipt of an email or other communication from you. Some jurisdictions may consider this site to constitute attorney advertising; accordingly, please be advised this is an advertisement.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that, to the extent this communication (or any attachment) addresses any tax matter, it was not written to be (and may not be) relied upon to (i) avoid tax-related penalties under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment).