It’s been some time since we talked about the step-up in basis, so I thought we’d revisit it.

It’s a powerful tool that saves families millions of dollars in income tax every year.

And it’s a missed opportunity for many families that don’t know about it and take actions that eliminate the step-up in basis.

Let’s dive in!

First, let’s define terms.

“Basis” for our discussion, is the term used to describe the value of your property at the time you purchased it.

The easiest example to use for our discussion is real estate – your home.

If you bought your house for $500k, your tax basis is $500k.

This is important, because it is used to calculate the capital gains income tax you will pay when you later sell the property.

If you sold that house 10 years later for $1m, you’d recognize $500k of gain and possibly have to pay capital gains tax on that (don’t worry about the exemptions and stuff for today – just high level on the capital gains tax calculations).

The tax on that gain would be about 20%, or $100k.

That’s not a small amount of money.

Now, what if you could just wipe that out.

Zip. Zero. Nada. Poof.

Well, if you do your estate planning correctly, you can.

There is a special rule called the “step-up in basis” which says when you die, any property you own has its basis reset to today’s value.

So, if you held onto that house for the rest of your life and when you died it was valued at $1.5m, the new basis for those that inherit that house will be $1.5m – which means they pay no tax on all the gain you experienced while owning the property.

Sounds pretty cool right?

It is.

And, there’s no downside.

And it applies to ALL property – real estate, art, cars, stocks, etc.

Now, let’s talk about how people mess this up.

The primary way to lose this step-up in basis is to give your assets away while you are alive.

Mom and dad want to avoid probate and think the best thing to do is give their house to their kids while they’re still alive.

So they do that, and miss out on thousands and thousands in tax savings (and also open themselves up to all sorts of other potential problems, which I’ll talk about in a future newsletter maybe).

This is just another instance of trying to do the right thing and executing poorly.

Remember this rule when thinking about your estate planning (you still get the step-up if your property is in a revocable living trust – and you DO NOT if it’s in an irrevocable trust, most of the time).

Hope you are having a great start to 2026.

Sincerely,

Christopher Small
Owner
CMS Law Firm LLC

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