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What Is a Stepped-Up Basis?

When you sell an asset, whether the proceeds of the sale are taxable often comes down to how much you had invested in that asset. That investment can typically be calculated using the purchase price of the investment, plus the cost of any improvements. Any depreciation or casualty losses claimed against the property should also be subtracted. The final number is your "basis." Any proceeds from the sale of the asset that exceed the basis are taxable.

But what happens when you sell an asset that you didn't purchase? This scenario comes into play when you are selling property that you received as an inheritance. The good news is that you won't owe tax on the entire sale price of the asset! Because many types of assets appreciate over time, IRS rules don't required you to use the decedent's basis. Instead, you'll use something called a "stepped-up basis." Rather than calculating your proceeds using the total the decedent had invested in the asset, you can use the property's value on the decedent's date of death. In some cases, the estate's executor will select an alternative date.

The bottom line is that you are allowed to consider the property's fair market value on the date you inherited the asset as your stepped-up basis. Then, if you ever sell the property, you'll be able to subtract that stepped-up basis from the total sale proceeds to determine what portion of the proceeds are taxable.

Have questions about figuring your stepped-up basis in a property? Aren't sure what part of a sale is taxable income? Just ask! Taxation Solutions, Inc. is your tax help expert. Call in our experienced professionals for assistance with questions large and small.