stepped-up basis
Stepped-up basis refers to a tax policy that looks at the market value of assets at the time a person inherits them instead of the value when the prior owner purchased the assets. For tax purposes, assets that are sold will be taxed for capital gains , and the more the asset value increases, the greater the capital gains taxes will be. Stepped-up basis can greatly reduce the capital gains taxes owed by someone inheriting property or other assets. For example, John purchased 100 shares of ABC Co. for $10 each, and Sarah inherited the shares after his passing when the stocks were worth $20 dollars each. When Sarah goes to sell the stocks five years later, they are worth $30 each. Under a stepped-up basis, Sarah would only pay capital gains taxes on the $10 gains between inheritance and selling the stocks ($30-$20=$10). If the stepped-up basis did not exist, Sarah would have to pay capital gains taxes on the $20 gains between John’s purchase price and selling the stocks ($30-$10=$20).
[Last updated in August of 2021 by the Wex Definitions Team ]
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