Hi, my name is Peter Keller, a CERTIFIED FINANCIAL PLANNER™ with Pure Financial Advisors and
this week we received a call from a client on what is a step-up in basis? It's a great
question and here's how it works:
Typically when you have an asset, a capital asset - and that can be defined as a stock,
bond, mutual fund, real estate, any kind of appreciating asset - when you make an investment
in that asset, you have what is called basis. And let's use an example where we have $100,000
as the basis, and let's say this asset, whatever it is, stock, bond, mutual fund, appreciates
in value to $500,000. That means you would then have a gain of $400,000. Now when an
individual passes away with this appreciated asset, the beneficiary gets this assets stepped
up to the fair market value, which means the beneficiary can now sell this and pay zero
in capital gains tax.
Now let's say in another scenario that this is a married couple and we have a couple of
different options in that scenario. So starting off with the same basis again in this appreciating
asset, we've got $50,000 as cost basis for one spouse and $50,000 of cost basis for the
other spouse. Again it appreciates to $500,000 in value. And that means this spouse has a
$200,000 gain, and this spouse has a $200,000 gain. If the asset was held as joint tenants
with rights of survivorship and one spouse passes away, all of this is basis, so there's
no capital gains tax, and this half would get stepped up for the deceased spouse. And
then the surviving spouse, if they wanted to sell this asset, they would then pay capital
gains tax on $200,000.
Now if we take it one step further with step up and basis on community property it works
a little bit different. So again, you have the same basis of $50,000 for each spouse
because that's the starting value, and that asset appreciated in value to $500,000. And
again, it's $200,000 of gain for each spouse. And with community property, when one spouse
passes away, the whole asset gets stepped up to the fair market value, and the surviving
spouse can sell this asset without paying any capital gains tax.
So that's cost basis stepped up explained. For further questions or comments, please
contact us at Pure Financial Advisors.