April 17, 2025
If you’ve ever inherited property or are planning to leave property to loved ones, there’s one sneaky little tax rule that can make a big difference: basis.
It’s not something most people think about when creating a will or trust — but understanding how the step-up in basis works (and how it’s different from carryover basis) can help your family avoid major tax consequences down the road.
Let’s break it down in plain English — because this one’s worth knowing.
First: What Is “Basis”?
“Basis” is basically what you (or the IRS) consider the starting value of an asset — like a home, stock, or investment — for tax purposes. When you sell that asset, you pay capital gains tax on the difference between the sale price and the basis.
So if you bought a home for $200,000 and later sold it for $600,000, your gain is $400,000 — and that’s what the IRS wants to tax.
Carryover Basis: The Rule for Gifts During Your Lifetime
If you gift someone an asset during your lifetime, they inherit your original basis — no matter how much it has grown in value.
Example:
You gift your child a home you bought for $100,000 in the 90s. It’s now worth $700,000.
If they sell it, they may owe capital gains taxes on $600,000. Ouch.
Step-Up in Basis: The Rule for Assets Passed After Death
Now here’s the good news: if someone inherits an asset after you pass away, the basis gets “stepped up” to its fair market value at the time of your death.
Example:
Same home, worth $700,000 when you pass. If your child sells it soon after for $700,000, the gain is $0.
That means no capital gains tax.
But here’s an important detail: the step-up only applies to the value at the time of death. If your child holds onto the property and it appreciates in value — say they sell it five years later for $900,000 — they may have to pay capital gains taxes on the $200,000 increase in value since your passing.
This is one of the most powerful tools in estate planning — especially in California, where real estate values have skyrocketed.
Why This Matters for Your Estate Plan
It’s common for families to try to “help” by adding a child to the deed early, gifting a house, or transferring property before death. But those decisions can trigger carryover basis and result in massive tax bills later.
We get it — it feels helpful in the moment. But from a planning perspective, the timing matters. A lot.
Our Take? Plan Smart, Preserve More
At JV Law Offices, we help families create estate plans that don’t just “get it done” — we build in tax strategy, family goals, and future flexibility. That includes conversations around how assets are transferred, when, and to whom — so you don’t accidentally create a tax mess for your loved ones.
The Bottom Line:
- Gifting now = carryover basis = potential taxes for your loved ones
- Inheriting later = step-up in basis = huge potential tax savings
Your estate plan isn’t just about who gets what. It’s about how they get it — and what it actually costs them. That’s why we do things differently here: more education, more strategy, more protection for the people you love.
Want to talk through how this might apply to your home, investments, or other assets?
Let’s schedule a time to chat. We’ll help you build a plan that protects your legacy and your family’s financial future.
This blog is our way of making sure you’re clued in and feeling good about this big life shift, with a helping hand from our team. Remember, we’re here to turn the legal jargon into something you can not only understand but use to empower your family. And, while we’re here to guide you through the legal landscape, remember this blog is for general information purposes and not a substitute for legal advice tailored to your unique situation
