What’s this whole step up in basis thing?

When we talk basis, we are talking about taxes. Generally speaking, basis equals cost. In the estate planning practice many times folks will want to get rid of their real property and deed it to their kids. That is fine and dandy, however, if your property transfers while you are alive, your basis is carried over to the kids. For instance, say you purchased your home for $50,000, 25 years ago. You transfer your home to your daughter in 2020, and she sells it a couple of years later for $200,000. Because the property was transferred to her while you were alive, she gets credit for the $50,000 that you paid for the home and she will be hit with a $150,000 in capital gains.

On the other hand, if the property transferred to her when you passed away, say in 2020, and she sold the home again a couple of years later for $200,000, she would be entitled to a stepped up basis (the fair market value of the home when you passed away). In our example, let’s say the fair market value at your death was $150,000. So, when your daughter sells the home for $200,000, the capital gain will only be $50,000.00.

Each individual has to analyze the situation for themselves and their family, however, it is important to at least think about these issues before you start transferring property while you’re still around.