When you inherit property, one key thing to understand is how the “step-up in basis” rules work. These rules can impact how much tax you pay when you sell the property. In this article, we’ll explain step-up in basis, how it applies to inherited property, and why it matters in 2025.
What is the Step-Up in Basis for Inherited Property?
The “step-up in basis” rule refers to how the value of inherited property is adjusted for tax purposes. When you inherit property like real estate, stocks, or other assets, the property’s value is adjusted to its market value at the time of the original owner’s death. This is important because, when you sell the property, taxes are based on the difference between the selling price and this new, stepped-up value.
For example, let’s say your grandmother bought a house for $100,000 many years ago. At the time of her death, the house is worth $500,000. The house’s “basis” will be stepped up to $500,000. If you sell the house for $510,000, your taxable gain will be $10,000 ($510,000 minus the $500,000 stepped-up basis). Without the step-up, you would have owed taxes on a $410,000 gain, which could have been much higher.
How Does the Step-Up in Basis Save Taxes on Inherited Property?
The step-up in basis rules can help you save money on taxes. If the property you inherit has appreciated a lot in value, the difference between its original price and its market value at inheritance can be large. Without this rule, you would pay taxes on that entire increase when you sell the property.
For example, your uncle bought land for $50,000, and at the time of his passing, the land was worth $250,000. Under the step-up in basis, your new basis is $250,000. If you later sell the land for $270,000, you would only pay taxes on the $20,000 gain, not the $220,000 increase from the original purchase price.
The Step-Up in Basis and Estate Taxes
While the step-up in basis can reduce taxes when selling inherited property, it doesn’t eliminate estate taxes. If the total value of the estate exceeds certain thresholds, estate taxes may still apply.
In 2025, the estate tax exemption is high—around $12 million per person. This means most people won’t need to worry about estate taxes. However, for estates larger than this amount, estate taxes will apply. Even if no estate taxes are owed, the stepped-up basis will still help you lower the taxes you pay when you sell the property.
Special Rules for Inherited Property
The step-up in basis rule applies to most inherited property, but there are some exceptions. For example, retirement accounts like IRAs and 401(k)s don’t get the benefit of a stepped-up basis. Instead, these accounts are taxed differently. When you inherit an IRA or 401(k), the value at the time of inheritance is treated as income when withdrawn.
Another important note: if you receive property as a gift rather than inheritance, the step-up in basis doesn’t apply. In this case, you inherit the original owner’s basis, which means if the property has gained value, you could owe taxes on the full gain when you sell it.
How to Use the Step-Up in Basis Rule in 2025
Understanding the step-up in basis rules is crucial in 2025. When you inherit property, you’ll need to determine its fair market value at the time of the original owner’s death. Often, you’ll need an appraiser to help figure out this value accurately.
Once you know the market value, that becomes your basis. When you sell the property later, your taxes will be based on the difference between the sale price and the stepped-up basis. A higher stepped-up value means a smaller taxable gain, reducing your taxes.
Be sure to keep good records of the property’s value at the time of inheritance. The IRS may ask for proof when reviewing your tax return.
Why the Step-Up in Basis is Important for Your Taxes
The step-up in basis can have a big impact on your taxes, especially as property values continue to rise. In 2025, understanding this rule will help you make better decisions about your inherited property. Whether it’s real estate, stocks, or other assets, the stepped-up basis can significantly lower your tax burden when you sell the property.
Consulting a tax professional is always a good idea. They can guide you through the process, help with paperwork, and ensure you’re minimizing taxes on your inheritance.
Conclusion: The Benefits of Step-Up in Basis in 2025
In 2025, the step-up in basis rules for inherited property continue to be an important tool for reducing taxes. These rules help you lower the taxes you pay when selling inherited assets by stepping up the value to its market value at the time of inheritance. By understanding how the step-up in basis works, you can make smarter decisions about managing and selling your inherited property.
Remember, always consult with a tax professional to get the most out of your inheritance and minimize your tax liability. Keep accurate records, and stay informed about changes in tax law to make the most of the step-up in basis rules.
