Step-Up In Basis

By Brett Bjornson

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Step-up in basis refers to the change in the cost basis for income tax purposes that results when someone dies.  Most of the assets owned by a person when they die obtain a step-up in tax basis to the fair market value of the respective asset as of the date of death.

To substantiate the tax basis adjustment for real estate, an appraisal is required.  If it is a publicly traded stock it is the average between the opening price and the closing price as of the date of death.  If a death occured on a weekend it’s the average between the opening and closing price on Friday, averaged against the average between the opening and closing price on Monday.

In a community property state (such as California) when a spouse dies, both halves (both the husband and the wifes’ halves) receive a step-up in basis if the asset is a community property asset.  For instance if a husband and wife had purchase a home and held it as a community property asset and one spouse dies, 100% of the tax basis in the house get’s stepped-up to the fair market value as of the date of death.  In other words, if the couple paid $50,000 for a house now worth $1,000,000, and one of them dies, the surviving spouse now has a new cost basis of $1,000,000.

One tricky consideration relative to valuation issues as of date of death is a creature known as “income in respect of a decedent.”  Assets that have “income in respect of a decedent” do not receive a step-up in basis but are still valued at the fair market value as of the date of death.  More to come on this topic later.