Senior homeowners inheriting or passing on property can take advantage of the “step‑up in basis” rule to minimize capital gains tax. It’s one of the most powerful tax provisions for estates and retirees—and proper planning can preserve substantial wealth.
📌 1. What Is Step‑Up in Basis?
- Upon inheritance, the cost basis of an asset resets to its market value at the decedent’s death rather than the original purchase price :contentReference[oaicite:1]{index=1}.
- This means any appreciation during the deceased’s lifetime is effectively wiped out for tax purposes if the heir sells soon after :contentReference[oaicite:2]{index=2}.
🏡 2. How It Benefits Senior Homeowners
If a parent bought a home decades ago for $100 k and it’s worth $500 k at death, the heir inherits it with a $500 k basis. Sell shortly after, and there’s little to no taxable gain—saving tens or hundreds of thousands in capital gains tax :contentReference[oaicite:3]{index=3}.
🤝 3. Community Property: Double Step‑Up For Spouses
In community property states (e.g., CA, TX, WA), both halves of the property get stepped up—even though only one spouse dies—doubling the tax advantage :contentReference[oaicite:4]{index=4}.
🔄 4. Strategic Planning for Property Transfer
- Hold assets until death: Don’t gift appreciated property during life—gifting retains original basis and passes on a tax burden :contentReference[oaicite:5]{index=5}.
- Use trusts wisely: Assets in revocable living trusts benefit from step‑up; irrevocable/trust-held assets may not unless structured correctly :contentReference[oaicite:6]{index=6}.
- Document improvements: Capital enhancements made during ownership (e.g., remodels) increase adjusted basis and reduce gain if sold alive—but aren’t needed post‑mortem when assets receive full step‑up :contentReference[oaicite:7]{index=7}.
📊 5. Tax Calculations with Step‑Up
- Identify the market value on date of death.
- Heir inherits with that stepped‑up basis.
- If sold immediately, gain is often zero or very small—so capital gains tax is minimal.
⚠️ 6. Exceptions and Pitfalls
- Retirement accounts (IRAs, 401(k)s) don’t get stepped up—distributions are taxed as income :contentReference[oaicite:8]{index=8}.
- Gifts made during life keep original basis (carryover basis)—capital gain remains :contentReference[oaicite:9]{index=9}.
- Assets held in certain irrevocable trusts may not qualify unless carefully structured :contentReference[oaicite:10]{index=10}.
🛡 7. Estate Tax and Basis Strategies
While estates under the federal exemption (≈ $14 M individual / $28 M couple in 2025) don’t pay estate tax, the step‑up in basis still eliminates income tax on appreciated assets—even in smaller estates :contentReference[oaicite:11]{index=11}.
📎 8. Planning Summary for Senior Homeowners
- Discuss with your estate attorney: ensure assets are owned in a way that qualifies for step‑up (e.g., outright or revocable trust).
- Avoid gifting highly appreciated property—better passed at death.
- Keep records of basis-increasing improvements.
- Consider community property benefits if applicable to double the stepped‑up basis.
- Know that inherited IRAs/401(k)s don’t get step‑up and are taxed upon distribution.
✅ Final Takeaway
The inheritance step‑up in basis is a cornerstone tax-saving tool for senior homeowners. By holding appreciated property until death and passing it through the right mechanisms, heirs can avoid massive capital gains taxes. But beware of gifting, trust design, and exceptions like retirement accounts. With thoughtful planning and proper documentation, seniors can protect their legacy and maximize savings for their heirs.
