Step-Up In Basis
Categories: Tax
Your great-uncle bought a decrepit old building in the downtown area of your town in 1973 for $50,000. Since then, a lot has changed. They've closed down the adult movie theaters and the drug houses that were in the neighborhood, and moved in the hipster coffee bars and sushi restaurants. The building he bought all those decades ago is now worth about $2 million.
Your great-uncle dies and leaves you the building. Time to assess values for taxes. Now your uncle bought the building for $50,000...and something is worth what someone is willing to pay for it, right? So, when the taxman comes looking, the building should be worth $50,000, right?
Luckily, it usually doesn't work like that. If you tried to sell the building for $2 million after inheriting it with an initial value basis of $50,000, you'd have a huge capital gains tax to pay.
Here's where step-up in basis comes in. The concept refers to a situation where the value of an asset is readjusted for inheritance. It happens when the value of the asset has appreciated since it was purchased. So...the building gets assessed at the $2 million market value it had when your uncle died, instead of what he paid back in the '70s.
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Finance: What is Tax Basis?8 Views
Finance allah shmoop What is tax basis Well your basis
is your cost Your costs for assessing how much you
owe when the tax man coming you bought a thousand
shares of whatever dot com at twelve bucks a share
in its eye po and huzzah Three years later the
stock is at thirty You decide whatever dot com is
now passe because a kardashians said so it'll be over
taken by whenever dot com and you want to sell
So you dio and you live in a thirty percent
marginal tax blue state And that is your federal tax
rates in twenty percent But then you add in ten
percent for state taxes and whatever's left for obamacare and
you pay about thirty percent tax on your gains Well
you paid twelve grand to buy the stock and after
the sale you took in thirty grand when you sold
it for a gain of eighteen thousand dollars Your tax
basis on those shares is twelve grand so you pay
thirty percent tax on the eighteen grand of gain or
fifty four hundred dollars to net from the sale of
thirty thousand dollars worth of stock How much Yeah twenty
Four thousand six hundred dollars He fancy math Had you
just gotten those shares free I'ii they were gifted to
you and you had no tax basis or a tax
basis of zero dollars a share Well then your gain
would have been from zero to thirty grand or a
gain of thirty thousand dollars to then be taxed at
thirty percent or nine grand in taxes to net just
twenty one thousand dollars after the sale So having ah
high tax basis or at least being able teo point
toe one saves you money when the tax man coming
and well that's pretty much it alright he's gone Now
you can all come out Come on it's Okay it's 00:01:53.698 --> [endTime] safe