Tax and Non-Tax reasons for married couples to have community property in a Step Up in Basis status.
By Kyle Krasa, Krasa Law in Pacific Grove, CA

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Step Up in Basis: A Valuable Tax Benefit for Married Couples

When it comes to financial planning, understanding the nuances of tax laws and regulations can play a significant role in optimizing your financial outcomes. One such beneficial provision, usually available to married couples in the United States, is the step up in basis. The step up in basis can be a valuable tool for saving on capital gains taxes and leaving a larger inheritance for your loved ones.

So, what exactly is the step up in basis? In simple terms, it refers to the adjustment of the cost basis of an asset, such as stocks, real estate, or other investments, to its fair market value upon the death of the original owner. This means that when an individual passes away, their assets receive an adjusted cost basis based on their value at the time of death. This can greatly benefit the surviving spouse or heirs when it comes time to sell these assets in the future.

For married couples, the step up in basis can be particularly advantageous. When one spouse passes away, their assets are transferred to the surviving spouse at a stepped-up basis value. This means that if the surviving spouse decides to sell the assets, they are only responsible for paying capital gains tax on the appreciation that occurs after the date of death. Any previous gains made during the deceased spouse’s ownership are effectively eliminated. This can result in significant tax savings for the surviving spouse.

For example, let’s say a married couple purchased a home 20 years ago for $200,000, and over the years, the value of the property has appreciated to $500,000. If one spouse passes away and the property is transferred to the surviving spouse, their cost basis would be adjusted to $500,000. If the surviving spouse decides to sell the property for $600,000, they would only be responsible for paying capital gains tax on the $100,000 difference between the stepped-up basis and the selling price, rather than on the entire $400,000 gain.

The step up in basis can also provide significant benefits when it comes to estate planning. By taking advantage of this provision, married couples can potentially leave a larger inheritance to their loved ones, as it allows for certain assets to be transferred without triggering significant tax liabilities for the beneficiaries. This can help preserve wealth and ensure that your heirs receive more of the assets you intend to pass on.

It is important to note that the step up in basis is an area of tax law that may be subject to changes and limitations, depending on legislation and regulations. Therefore, seeking professional advice from a qualified tax advisor or financial planner is essential to fully understand and optimize this tax benefit within the current legal framework.

In conclusion, the step up in basis for married couples offers significant tax advantages when it comes to transferring assets and planning for the future. By taking advantage of this provision, couples can potentially save on capital gains taxes and leave a larger inheritance to their loved ones. However, it is crucial to stay up-to-date with current tax laws and consult with an expert to make the most of this valuable tax benefit.