Think about spending your life constructing wealth, investing in actual property, shares, or your corporation, with the hope of leaving a legacy to your kids. Then sooner or later, you end up questioning: Will the federal government take a large chunk of it anyway?
In case your property is effectively above the federal property tax exemption threshold — $30 million for a married couple in 2026 beneath the OBBBA — you is likely to be asking a really legit query:
“What’s the purpose of the step-up in foundation if my property nonetheless owes thousands and thousands in property taxes?”
Conversely, in case your property is effectively beneath the federal property tax exemption threshold, you may additionally ask the extra frequent query:
“What’s the advantage of the step-up in foundation if I will not be paying the demise tax anyway?”
As a result of I am not useless but, I have not been targeted an excessive amount of on the property tax owed upon demise. Nevertheless, like every good pre-mortem planner who thinks in two timelines, it is essential to make clear the confusion and plan accordingly.
Let’s stroll by way of the way it all truly works. I’ll clarify it with three examples, so that you’ll stroll away understanding why the step-up in foundation nonetheless issues and why property tax planning turns into vital the wealthier you get.
The Fundamentals: Step-Up in Foundation vs Property Tax
The important thing to understanding how the step-up in foundation helps, no matter your property’s worth is understanding there are two fully totally different taxes in play when somebody dies:
1. Property Tax – a tax on the complete worth of your property at demise, in case your property exceeds the federal exemption. This tax is paid by the property.
2. Capital Positive factors Tax – a tax on the appreciation of property, however provided that these property are bought. This tax is paid by your heirs.
When somebody dies, their heirs get a step-up in value foundation on inherited property. Which means the asset’s value foundation is reset to the truthful market worth (FMV) on the date of demise. The capital positive factors from the decedent’s lifetime are basically worn out.
For those who’re searching for a monetary purpose to carry onto your shares, actual property, and different property indefinitely, the step-up in value foundation is a compelling one. As a substitute of promoting your property, do what billionaires do, and borrow in opposition to them.
I used to suppose it was wasteful for buyers to by no means promote and revel in a greater life alongside the best way. Nevertheless it seems, by no means promoting is likely to be the best present you could possibly depart your grownup kids.
Step-up In Foundation vs Property Tax Instance 1: A $50 Million Home
To assist us higher perceive how the step-up in foundation and the property tax threshold works, I wish to use an excessive instance. Pondering in extremes helps you perceive something higher.
Let’s say you and your partner personal a single home value $50 million. You purchased it many years in the past for $1 million, and it’s now your major residence. You each cross away, and your two kids inherit the property.
Capital Positive factors Tax:
Usually, in case your kids bought that home with a $49 million achieve, they’d owe capital positive factors tax — round 20% federal plus 3.8% internet funding revenue tax. That’s over $11 million in taxes.
However due to the step-up in foundation, the associated fee foundation resets to $50 million. In the event that they promote the home for $50 million the day after your demise, they owe zero capital positive factors tax. Hooray for a tax-free generational wealth switch—only for having the great fortune of being born to a wealthy financial institution of mother and pop!
Nicely, not fairly.
Property Tax:
However you’re not off the hook solely. As a result of your property is value $50 million (you haven’t any different property however the $50 million home) and the federal property tax exemption for a married couple is $27.98 million in 2025, the taxable property is $22.02 million.
At a 40% tax fee, that’s a $8.8 million property tax invoice. Ouch.
And right here’s the important thing level: the property tax comes first. It must be paid earlier than the heirs get the property — and it’s paid out of the property itself.
So the executor (maybe your kids) both:
- Must promote half or all the home to pay the property tax, or
- Use different liquid property within the property (if any) or borrow in opposition to the home
- Borrow Towards the Property (Property Takes Out a Mortgage)
- Use Life Insurance coverage (Irrevocable life insurance coverage trusts)
- File a 6-month extension with the IRS and ask to pay in installments
If you’ve got a big, illiquid property, you could plan forward to determine easy methods to pay the property tax.
So What’s the Level of the Step-Up?
At first look, this appears discouraging. You continue to owe tax, so what did the step-up even prevent?
Right here’s the factor: With out the step-up, the tax invoice is way worse.
Think about the identical state of affairs, however there was no step-up in foundation. The youngsters inherit your $50M home with a $1M value foundation. Now the whole taxes owed are:
• Property tax: $8.8 million
• Capital positive factors tax (in the event that they promote): 23.8% of $49 million = ~$11.7 million
Whole tax: $20.5 million
That’s 40% of the worth of the property gone to the federal government. With the step-up in foundation, that complete tax burden drops to simply the $8.8 million property tax from $20.5 million.
In different phrases, the step-up in value foundation prevents double taxation. It doesn’t make property tax go away — nevertheless it shields your heirs from additionally having to pay capital positive factors tax on the identical appreciated worth.
Step-up In Foundation vs Property Tax Instance 2: A $40 Million Inventory Portfolio
Let’s say your internet value is in tech shares you obtain within the early 2000s. Possibly you bought into Amazon at $50 a share or invested in a portfolio of personal AI firms. Your portfolio’s now value $40 million, and your value foundation is barely $2 million.
While you cross away:
- Your heirs obtain the inventory at a stepped-up foundation of $40 million
- In the event that they promote immediately, they owe no capital positive factors tax
- But when your complete property (together with different property) exceeds the exemption, they’ll nonetheless face property tax on the quantity over the edge
Let’s say your property is $45 million, and also you’re married. With a $25 million exemption on the time of demise, the taxable property is $20 million, equaling an property tax of $8 million.
Once more, the step-up doesn’t prevent from the property tax, nevertheless it saves your heirs from owing capital positive factors tax on $38 million in positive factors, which might have been one other $9 million or so.
Step-Up in Foundation Instance 3: A $4 Million Rental Property
Let’s say you obtain a rental property 30 years in the past for $400,000. Over time, its worth has appreciated to $4 million, and it’s now absolutely paid off. You haven’t any mortgage, and your complete property—together with this property, some retirement financial savings, and different property—is value $5 million.
Because the federal property tax exemption for a person is $13.99 million in 2025 (or $27.98 million for a married couple), your property is effectively beneath the taxable threshold. Which means no property tax is due—your heirs get the whole lot with out the property owing a penny to the IRS.
However right here’s the place the step-up in foundation makes a large distinction:
Capital Positive factors Tax With out the Step-Up:
For those who gifted the property to your baby whereas alive, they’d inherit your authentic $400,000 foundation, not the $4 million truthful market worth. In the event that they later bought it for $4 million, they’d owe capital positive factors tax on $3.6 million of positive factors — possible over $850,000 in taxes, relying on their revenue and state.
Then again, if you happen to maintain the property till your demise, then your heirs get a step-up in foundation to the truthful market worth in your date of demise — on this case, $4 million. In the event that they promote immediately, no capital positive factors tax is due.
So paradoxically, doing nothing and holding onto the property till demise is commonly probably the most tax-efficient technique. So maybe your boomer dad and mom aren’t so grasping in spite of everything for not serving to you extra whereas alive.
Capital Positive factors Tax With the Step-Up:
However if you happen to maintain the property till demise, the idea is stepped as much as the $4 million truthful market worth. Your heirs can then promote it for $4 million the day after inheriting it and owe zero capital positive factors tax.
Who Pays What Tax?
- Property tax is paid by the property, if owed, earlier than property are distributed.
- Capital positive factors tax is barely paid by the heirs in the event that they promote the asset and provided that there’s a achieve past the stepped-up foundation.
On this third instance, as a result of the property is beneath the exemption restrict and your heirs promote proper after inheriting, neither the property nor the heirs pay any tax. Hooray for not being wealthy sufficient to pay much more taxes!
The Step-Up Is a Reward — However It’s Not a Protect
Consider the step-up in foundation as a forgiveness of capital positive factors tax, however not a full pardon from all taxes.
You’re nonetheless topic to the property tax in case your property exceed the exemption. However the step-up could make an enormous distinction within the after-tax inheritance your kids obtain.
For high-net-worth households, the step-up is important to forestall what might in any other case change into a 60%+ mixed tax burden.
Even if you happen to don’t count on your property to be massive sufficient to set off property tax, the step-up in foundation can nonetheless save your heirs tons of of 1000’s to thousands and thousands of {dollars} in capital positive factors taxes.
The step-up is without doubt one of the most highly effective property planning instruments accessible — and a compelling purpose to carry onto appreciated property till demise, particularly in case your aim is to maximise what you cross on.
Actions You Can Take To Scale back Your Property Tax
In case your property is effectively above the federal exemption — particularly if most of your wealth is tied up in a single asset like a enterprise, property, or concentrated inventory place — it is advisable to plan forward. Some methods embrace:
1. Grantor Retained Annuity Belief (GRAT)
Transfer appreciating property out of your property into trusts, like a Grantor Retained Annuity Belief (GRAT) or Deliberately Faulty Grantor Belief (IDGT). These take away future appreciation out of your taxable property.
Instance: Put $1M of quickly appreciating property (like shares or actual property) right into a short-term, 2-year GRAT. You get annuity funds again, and the longer term appreciation passes to heirs gift-tax free.
- Switch $2M right into a 2-year GRAT
- Obtain $1M/12 months again in annuities
- Asset appreciates 8% yearly
- After 2 years, extra development goes to heirs estate-tax free
A Revocable Residing Belief Would not Scale back Your Taxes
For these questioning whether or not placing your property in a revocable dwelling belief can assist you save on property taxes or capital positive factors taxes — it doesn’t. A revocable dwelling belief is primarily a device for avoiding probate, sustaining privateness, and streamlining the distribution of your property after demise.
Whereas it does guarantee your heirs obtain the step-up in foundation on appreciated property (for the reason that belief continues to be thought-about a part of your property), it doesn’t cut back your property’s worth for property tax functions. The IRS treats property in a revocable belief as if you happen to nonetheless personal them outright.
In different phrases, the belief helps with logistics and effectivity — not with lowering your tax invoice. In case your aim is to decrease your property taxes, you will must discover different methods, corresponding to lifetime gifting, irrevocable trusts, or charitable giving, which truly take away property out of your taxable property.
2. Annual Gifting
You and your partner may give as much as $19,000 (2025) per particular person, per 12 months to anybody with out lowering your lifetime exemption. The annual present restrict tends to go up yearly to account for inflation.
Instance: you and your partner have 2 kids and 4 grandchildren. That’s 6 folks × $19,000 × 2 spouses = $228,000/12 months.
Over 10 years:
- $228,000 × 10 = $2.28 million eliminated out of your property
- These items additionally shift appreciation out of your property, compounding the profit
In case your property is effectively beneath the property tax exemption quantity, annual gifting will not make a distinction for property tax discount functions. You’ve got simply determined to assist your kids or others now, moderately than after you are useless.
Additional, you are free to provide greater than the present tax restrict a 12 months if you want. Technically, you are alleged to file Type 709 if you happen to do, however I do not suppose it issues if you happen to’re method beneath the property tax threshold.
3. Charitable Giving
Donating a part of your property to a charity can cut back your taxable property and assist causes you care about. Charitable the rest trusts can present revenue for you and a profit to your heirs, whereas lowering the tax burden.
Instance: You arrange a Donor Suggested Fund and donate $100,000 a 12 months to your kids’s personal faculty for 10 years. Not solely do you assist your faculty, you cut back your taxable property by $1,000,000 and get a board seat. In flip, your kids get a leg up in entering into one of the best highschool and schools.
4. Purchase Life Insurance coverage in an ILIT
Life insurance coverage held inside an Irrevocable Life Insurance coverage Belief (ILIT) can present your heirs with liquidity to pay property taxes — with out the proceeds being taxed as a part of your property.
Instance: Purchase a $3 million life insurance coverage coverage inside an ILIT. The belief owns the coverage and receives the payout tax-free if you die.
That $3 million demise profit can be utilized by your heirs to pay property taxes, in order that they don’t must promote property.
Professional: Offers tax-free liquidity.
Con: You could surrender management of the coverage (however can fund premiums through gifting).
5. Charitable The rest Belief (CRT)
Place appreciated property right into a CRT. You obtain revenue for all times, and if you die, the rest goes to charity. You get a partial property tax deduction now.
Instance:
- Donate $5M appreciated inventory
- You obtain $200K/12 months revenue
- Get a charitable deduction at the moment (~$1.5–2M)
- Keep away from capital positive factors on sale of inventory contained in the belief
- Reduces taxable property by $5M
Professional: Provides you revenue, avoids capital positive factors, helps charity
Con: Your heirs don’t obtain the donated asset
6. Household Restricted Partnership (FLP)
Put property into an FLP and present minority pursuits to relations. As a result of these pursuits lack management and marketability, the IRS means that you can low cost their worth by 20–35%.
Instance:
- Transfer $20M into an FLP
- Reward 40% curiosity to heirs
- With a 30% low cost, worth is reported as $5.6M, not $8M
- Reduces reported property worth considerably
Professional: Retains management whereas lowering taxable property
Con: IRS scrutinizes reductions — should be achieved rigorously
7. Relocate To A Decrease Tax State Or Nation
Lastly, you might wish to contemplate relocating to a state with no state property or inheritance tax earlier than you die. There are over 30 such states. For those who can efficiently set up residency, your property—and in the end your heirs—might save thousands and thousands of {dollars} in taxes.
Now, if you happen to’re a multi-millionaire occupied with shifting to a different nation to keep away from property taxes, remember: there’s no escaping the federal property tax in case your property exceeds the exemption threshold. Even if you happen to’ve lived overseas for many years, so long as you’re a U.S. citizen, your total worldwide property stays topic to U.S. federal property tax upon your demise.
Nevertheless, if you happen to formally resign your U.S. citizenship, the principles change. You’ll not owe U.S. property tax on non-U.S. property—solely on U.S.-situs property like actual property and U.S. shares. However there’s a catch: in case your internet value exceeds $2 million, or if you happen to can’t certify 5 years of U.S. tax compliance, you’ll be labeled as a “lined expatriate” and could also be topic to an exit tax beneath IRC Part 877A.
This exit tax treats all of your worldwide property as in the event that they had been bought the day earlier than you resign, taxing any unrealized positive factors above a sure exemption.
Closing Ideas: The Step-Up in Foundation Helps A Lot
In case your property is beneath the federal exemption, the step-up in foundation stays a strong device that lets your heirs inherit appreciated property tax-free. By holding onto your wealth till demise, your heirs obtain a stepped-up value foundation and may keep away from capital positive factors taxes in the event that they promote. In distinction, if you happen to present appreciated property throughout your lifetime, the recipient inherits your authentic value foundation, probably triggering important capital positive factors taxes upon sale.
As soon as your property exceeds the exemption threshold, the federal property tax kicks in. With out correct planning, your heirs could even be compelled to promote priceless property simply to cowl the tax invoice. The step-up helps, nevertheless it’s not an alternative to a considerate property plan. Methods like GRATs, ILITs, and charitable trusts can dramatically cut back and even remove your property tax legal responsibility, however provided that you begin planning early.
Additionally remember: not all property get a step-up in foundation. Pre-tax retirement accounts like IRAs and 401(okay)s don’t qualify. As a substitute, your heirs will owe abnormal revenue tax after they withdraw the cash—not capital positive factors.
Your greatest transfer? Discuss to an skilled property planning lawyer. Now we have, and it made a world of distinction for our peace of thoughts. The step-up could save your heirs from one tax, however the IRS continues to be ready with one other.
Readers, are you now much less upset about your rich dad and mom holding onto their property as an alternative of gifting them to you whereas they’re nonetheless alive—due to the step-up in value foundation? Does it make extra sense for extra of us to maintain onto appreciated property till demise and borrow in opposition to them if wanted, moderately than promote and set off capital positive factors taxes?
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