Estate Planning & Living Trusts
25. Stepped-up basis example (cont.)
As shown here on the right, Tom sells the house for the same $250,000. But because he received the house as an inheritance after Bob died instead of as a gift while Bob was living, the property receives a new stepped-up basis. The basis is now the value as of the date of Bob's death-$250,000.
So now when Tom sells the house, there is no gain on the sale-and no capital gains tax to pay. By not giving the house to him while he was alive, Bob would save Tom $34,500 in capital gains taxes.
Now, if your estate is larger and you can afford to give away an asset, gifting can be a great way to reduce estate taxes. We'll discuss estate taxes later on.