Many Florida families worry about taxes when a parent leaves them property. Wondering what is the meaning of step-up in basis in plain English? It is a tax rule that can lower capital gains tax on inherited items like real estate or stocks by resetting the cost basis to the fair market value on the date of death. Carol L. Grant, P.A., explains step-up in basis with simple examples so families keep more of what their loved ones built. Keep reading to see how this rule works in Florida and why it matters for a family’s future.
Key Takeaways
- Step-up in basis resets the cost basis of inherited assets to fair market value on the owner’s date of death, which can lower capital gains taxes for the beneficiary.
- Florida assets that may qualify include real estate, stocks, bonds, business interests, and collectibles; retirement accounts like IRAs and 401(k)s do not qualify.
- Florida is a common law state; usually only the deceased spouse’s share receives a step-up. In community property states, both halves often get a full reset.
- Executors may choose the date of death or an alternate date up to six months later for asset valuation, which can reduce tax bills for Florida families.
- Knowing what receives a step-up helps with estate planning, property transfer, and tax policy decisions, and protects heirs from avoidable taxes.
Definition of Step-Up in Basis
A step-up in basis means the cost basis, the number used to figure tax gain or loss, changes to the fair market value when the owner dies. For instance, if a stock was bought for $100 but is worth $1,000 at death, the heir’s new cost basis becomes $1,000. Later gains are measured from that higher number.
This can reduce capital gains tax if the asset is sold after inheritance. In Florida, many types of property receive this reset, such as homes, stocks, bonds, mutual funds, digital coins, and collectibles. Retirement accounts, including IRAs and 401(k)s, do not get a step-up in basis. The next section shows how this works for Florida residents.
How Does Step-Up in Basis Work in Florida?
Florida heirs often receive assets at fair market value, not the original cost basis. That shift can cut capital gains tax if the asset is sold soon after the death.
Adjustment to Fair Market Value
A step-up in basis updates the cost basis of an inherited asset to its fair market value on the date of death. Take a home in Pembroke Pines that was purchased for $100,000 and is worth $400,000 at death. The heir’s cost basis resets to $400,000.
This uses current asset valuation rules and avoids tax on growth that happened during the original owner’s life. If the heir sells shortly after inheriting, any taxable gain is small, since only new growth after death is taxed.
The IRS allows valuation as of the date of death or an alternate valuation date up to six months later, if the executor elects it. That choice can affect families across Miami and Fort Lauderdale who want better tax outcomes during inheritance.
Impact on Capital Gains Taxes
Florida heirs often see major tax savings from the step-up rule. If a parent bought real property for $100 and it is worth $1,000 at death, the new cost basis is $1,000. Selling soon after may trigger little or no capital gains tax, since gain is measured from the stepped-up value.
This benefit applies to real estate, stocks and bonds, business interests, and collectibles. It does not apply to most retirement accounts. Knowing the difference guides smart estate planning choices and helps protect family wealth.
Assets Eligible for Step-Up in Basis in Florida
Several Florida assets may receive a step-up in basis at death. This reset can reduce capital gains tax for heirs who later sell the asset.
Real Estate
Florida homes, condos, vacation places, and rental properties qualify for a step-up in basis. The cost basis becomes the fair market value on the date of death. If a parent bought a home for $150,000 and it is worth $500,000 at death, the heir’s new basis is $500,000.
That reset can make a later sale less taxing. Taxes apply only to gains above the stepped-up value. Families in Pembroke Pines, Fort Lauderdale, and Miami can use current valuation standards to lower tax exposure.
Stocks and Bonds
Stocks and bonds held in taxable accounts receive a step-up in basis. A share purchased for $100 and worth $1,000 at death gets a new $1,000 basis. Selling right away would not add capital gains tax on the $900 rise during the original owner’s life.
This rule does not apply to shares or bonds inside retirement accounts like IRAs or 401(k)s. The step-up helps families pass investment gains across generations under Florida estate planning rules.
Business Interests
Business interests, such as a share in a family company, partnership units, or certain corporate stock, can qualify for a step-up in basis. The heir’s new basis equals fair market value on the date of death. If a Fort Lauderdale restaurant interest was bought for $50,000 and is worth $300,000 at death, the $300,000 becomes the starting point for future tax gain.
This can save heirs a large amount when selling later. Guidance from experienced counsel, such as Carol L. Grant, Esq., who has served South Florida since 1997, helps families protect their legacies using these rules.
Collectibles
Collectibles include art, antiques, heirlooms, rare coins, and valuable memorabilia. At inheritance, the cost basis becomes the fair market value on the date of death.
A solid appraisal helps set an accurate value. With a correct valuation, heirs may owe little or no capital gains tax if they sell soon after. Careful planning can help families in Pembroke Pines, Fort Lauderdale, and Miami keep more value from these items.
Assets Not Eligible for Step-Up in Basis in Florida
Some assets do not get a step-up in basis at death. Heirs may face higher taxes if they sell these items later, so careful review matters before making a property transfer.
Retirement Accounts (e.g., IRAs, 401(k)s)
Traditional IRAs and most 401(k)s do not receive a step-up in basis in Florida. The cost basis does not change when the owner dies. Instead, the heir pays income tax on withdrawals at ordinary income rates.
That can mean a larger tax bill compared to assets that do receive a step-up. For example, if an adult child inherits a $250,000 IRA in Pembroke Pines or Miami, withdrawals are taxed as income. Planning for these taxes can ease the burden on heirs across South Florida.
Certain Corporate Assets
Assets held inside some C-corporations do not get a step-up in basis at death. If a C-corporation owns real estate or equipment, the inside asset basis usually does not reset for the heirs. Capital gains may be measured from the original purchase price, not a higher value at death.
Florida families should review how each asset is held before making estate plans. Some assets keep their old basis inside a corporation, which can raise taxes on a later sale. When in doubt, get legal advice and check probate process details.
Step-Up in Basis for Married Couples
Results differ for married couples based on how property is titled. That choice affects asset valuation, capital gains tax, and how much a beneficiary may owe after a transfer.
Community Property States
In community property states like California and Texas, most assets gained during marriage are owned together. If one spouse dies, both halves of the shared assets often receive a full step-up in basis. The basis resets to fair market value for the entire asset at the time of death.
This can deliver major tax savings for a surviving spouse. Taxes on future sales usually apply only to growth after the date of death. Florida does not follow these rules because it is not a community property state, but the comparison helps explain why some couples elsewhere see larger savings.
Common Law States
Most states, including Florida, follow common law rules. Each spouse owns assets either in their own name or as joint tenants with rights of survivorship. If a couple owns a home or stock together, only the deceased spouse’s share usually gets a step-up in basis.
That split can shape tax results when selling. Consider a Miami couple who bought a home for $200,000 and titled it jointly. If the home is worth $400,000 at death, the survivor receives a step-up only on half. Taxes on a later sale are reduced only for the deceased spouse’s portion. Good planning can limit future taxes tied to wealth transfer.
Examples of Step-Up in Basis Calculations
Consider a stock bought for $100 and worth $1,000 at the owner’s death. The heir’s new cost basis is $1,000. If the heir sells right away, there is no capital gains tax on the $900 rise that happened during the original owner’s life.
Real estate works the same way. A Pembroke Pines home bought for $200,000 and worth $500,000 at death gets a new $500,000 basis. Selling soon after can save thousands in capital gains taxes. Collectibles like art or coins can qualify for the reset. Retirement accounts usually do not.
Importance of Step-Up in Basis in Estate Planning
Step-up in basis is a key tool in estate planning for Florida families. It protects heirs in Pembroke Pines, Fort Lauderdale, and Miami from large capital gains tax on long-held assets. The IRS allows the cost basis to reset to fair market value at death, which can erase years of prior appreciation for tax purposes.
For example, if a parent bought property for $100 and it is worth $1,000 at death, the heir’s new basis is $1,000. No capital gains tax is owed on the $900 growth before death. This relief applies to many assets, including homes and investments, but usually not to IRAs or 401(k)s and some corporate holdings.
Knowing what qualifies can prevent tax surprises during probate or trust administration. With clear planning, families can pass wealth more smoothly and reduce stress during a hard time. A brief meeting with a local attorney or tax professional can confirm the right steps for a specific situation.
Conclusion
Step-up in basis can greatly reduce capital gains tax on inherited assets by resetting cost basis to fair market value at death. Florida families who understand how it applies to real estate, investments, and business interests can better protect an inheritance and make wiser choices about when to sell.
For those in Pembroke Pines, Fort Lauderdale, and Miami, a short review of titles, account types, and asset valuation can pay off. Pair that review with clear guidance on retirement accounts and corporate holdings, since those rules differ. This material is for general education, not legal advice. Speak with a qualified Florida attorney or tax advisor before making decisions about an estate or property transfer.
FAQs
1. What does "step-up in basis" mean for inherited property?
Step-up in basis means the value of an asset, like a house or stocks, resets to its fair market price on the date the original owner dies. This new value becomes your starting point if you later sell that asset.
2. How does step-up in basis affect capital gains tax?
If you inherit property and then sell it, only profits above the stepped-up value are taxed as capital gains. This can lower your tax bill compared to using what the previous owner paid.
3. Are all assets eligible for a step-up in basis after someone passes away?
Most investment assets such as real estate and company shares get a step-up in basis when passed down at death. Some retirement accounts do not qualify; check with a financial expert for details about specific holdings.
4. Why is understanding step-up in basis important for families planning estates?
Knowing how step-up in basis works helps families reduce taxes when passing wealth to heirs. It also guides decisions about which assets to keep or transfer during life versus at death, making estate plans more effective and efficient.
