Capital Gains & Stepped-Up Basis: What Does That Mean for My Estate Plan?
The rise of retail investors—nonprofessional investors trading on platforms like Robinhood—has been fueled by cryptocurrency and market opportunities during the pandemic. At the same time, despite higher interest rates, real estate prices have remained stable, and in some cases, continued to climb.
With rising real estate values and growing investment portfolios, many are turning to attorneys and accountants to discuss capital gains tax implications.
What Are Capital Gains?
Capital gains taxes are imposed on the profit from selling capital assets, such as stocks, bonds, and real property. The tax is calculated based on the difference between the asset’s original purchase price (its “basis”) and its selling price.
Factors Affecting Capital Gains Tax
Three primary factors influence capital gains taxes:
- Profit: No capital gains tax applies when an asset is sold for a a loss.
- Holding Period: Assets held for more than one year are subject to long-term capital gains treatment, typically taxed at a lower rate than short-term gains.
- Income Tax Bracket: Your tax rate depends on your income bracket.
Federal short-term capital gains are taxed at the same rate as ordinary income. For long-term capital gains, rates vary but can go up to 20% depending on overall income. Additionally, a 3.8% net investment income tax may apply to taxpayers above certain income thresholds.
How Capital Gains Impact Estate Plans
A key estate planning strategy for minimizing capital gains taxes is the “step-up in basis.” This policy adjusts the asset’s basis to its fair market value at the time of death, eliminating the capital gains tax that would have been owed on appreciation during the owner’s lifetime.
For example, if a cabin bought for $100,000 has a market value of $800,000 at the owner’s death, the beneficiaries receive the cabin with a stepped-up basis of $800,000. If they sell it for that amount, no capital gains tax applies. In contrast, selling the cabin during the owner’s lifetime would have resulted in a tax on $700,000 of gain.
Step-Up in Basis for Joint Property
In common law property states like Minnesota, the step-up applies only to the decedent’s share of jointly held property. Using the cabin example, if a couple owns the cabin jointly and one spouse dies, the surviving spouse receives a stepped-up basis on the decedent’s half. If the decedent’s basis was $50,000 and their share’s market value was $400,000, the surviving spouse’s new basis would be $450,000, reducing taxable gains.
The Estate Planning Benefits
The step-up in basis applies to non-retirement assets that pass to beneficiaries upon death and can result in significant income tax savings for your heirs. For many, preserving these tax savings is an important estate planning consideration.
Planning Ahead
To maximize the benefits of a step-up in basis and other tax-saving strategies, consult with an experienced estate planning attorney. At Henson Efron, our estate planning attorneys help clients create strategies that reduce taxes and preserve wealth for future generations, keeping your needs at the forefront.
For personalized assistance, contact us at Henson Efron.
For additional details on federal capital gains tax rates, you can refer to the IRS Publication 550 or the Net Investment Income Tax.
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