Think about spending your life constructing wealth, investing in actual property, shares, or what you are promoting, with the hope of leaving a legacy on your youngsters. 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 could be asking a really reliable 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 also ask the way more widespread query:
“What’s the good thing about the step-up in foundation if I will not be paying the demise tax anyway?”
As a result of I am not lifeless but, I have never been centered an excessive amount of on the property tax owed upon demise. Nonetheless, like all 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 come away understanding why the step-up in foundation nonetheless issues and why property tax planning turns into important 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 figuring out there are two fully totally different taxes in play when somebody dies:
1. Property Tax – a tax on the complete worth of your belongings at demise, in case your property exceeds the federal exemption. This tax is paid by the property.
2. Capital Good points Tax – a tax on the appreciation of belongings, however provided that these belongings are bought. This tax is paid by your heirs.
When somebody dies, their heirs get a step-up in value foundation on inherited belongings. Which means the asset’s value foundation is reset to the truthful market worth (FMV) on the date of demise. The capital good points from the decedent’s lifetime are primarily worn out.
For those who’re on the lookout for a monetary cause to carry onto your shares, actual property, and different belongings indefinitely, the step-up in value foundation is a compelling one. As an alternative of promoting your belongings, do what billionaires do, and borrow towards them to incur no capital good points tax legal responsibility.
I used to suppose it was wasteful for traders to by no means promote and luxuriate in a greater life with the proceeds alongside the way in which. Nevertheless it seems, by no means promoting could be the best reward you possibly can go away your grownup youngsters.
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 need to use an excessive instance. Pondering in extremes helps you perceive something higher.
Let’s say you and your partner personal a single home price $50 million. You got it a long time in the past for $1 million, and it’s now your major residence. You each cross away, and your two youngsters inherit the property.
Capital Good points Tax:
Usually, in case your youngsters bought that home with a $49 million achieve, they’d owe capital good points 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 good points 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 pa!
Effectively, not fairly.
Property Tax:
Regardless of being lifeless, you’re not off the hook totally. As a result of your property is price $50 million (you don’t have any different belongings 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 youngsters) both:
- Need to promote half or the entire home to pay the property tax, or
- Use different liquid belongings within the property (if any) or borrow towards the home
- Borrow In opposition to 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 gotten a big, illiquid property, you could plan forward to determine 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 far worse.
Think about the identical state of affairs, however there was no step-up in foundation. The children inherit your $50M home with a $1M value foundation. Now the whole taxes owed are:
• Property tax: $8.8 million
• Capital good points tax (in the event that they promote): 23.8% of $49 million = ~$11.7 million
Complete 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 good points tax on the identical appreciated worth.
Step-up In Foundation vs Property Tax Instance 2: A $45 Million Inventory Portfolio
Let’s say your internet price is usually tied up in tech shares to procure within the early 2000s. Perhaps you bought into Amazon at $50 a share or invested early in a basket of personal AI firms. Now, your portfolio is price $45 million, however your value foundation is barely $2 million.
Once you cross away:
- Your heirs obtain the inventory with a stepped-up foundation of $45 million
- In the event that they promote instantly, they owe no capital good points tax
- Nonetheless, in case your complete property (together with different belongings) exceeds the federal exemption, they’ll nonetheless face property tax on the quantity over the edge
Let’s say your complete property is price $45 million and also you’re married. Assuming you’ve correctly elected portability and the mixed federal property tax exemption on the time of demise is $25 million, your taxable property could be $20 million. At a 40% property tax fee, the property would owe roughly $8 million. This tax have to be paid earlier than distributions to your heirs, that means they’d obtain roughly $37 million, not the complete $45 million.
The excellent news is that the step-up in value foundation applies to the complete $45 million, not simply the $37 million your heirs truly obtain after taxes. So in the event that they promote the belongings for $45 million, they’ll owe zero capital good points tax as a result of their value foundation has been reset to the truthful market worth on the time of demise.
With out the step-up, they’d inherit your unique value foundation of $2 million. In the event that they bought the portfolio for $45 million, they’d owe capital good points tax on $43 million in unrealized good points. On the 23.8% federal long-term capital good points fee, that’s over $10 million in potential tax — on high of the $8 million in property tax.
Step-Up in Foundation Instance 3: A $4 Million Rental Property
Let’s say to procure a rental property 30 years in the past for $400,000. Over time, its worth has appreciated to $4 million, and it’s now totally paid off. You haven’t any mortgage, and your complete property—together with this property, some retirement financial savings, and different belongings—is price $5 million.
For the reason that 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 every little thing 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 Good points Tax With out the Step-Up:
For those who gifted the property to your youngster whereas alive, they’d inherit your unique $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 good points tax on $3.6 million of good points. That is probably over $850,000 in taxes, relying on their revenue and state.
Then again, when you 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 straight away, no capital good points tax is due.
So sarcastically, doing nothing and holding onto the property till demise is usually essentially the most tax-efficient technique. So maybe your boomer mother and father aren’t so grasping in any case for not serving to you extra whereas alive.
Capital Good points Tax With the Step-Up:
However when you 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 good points tax.
Who Pays What Tax?
- Property tax is paid by the property, if owed, earlier than belongings are distributed.
- Capital good points 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 Present — However It’s Not a Protect
Consider the step-up in foundation as a forgiveness of capital good points tax, however not a full pardon from all taxes.
You’re nonetheless topic to the property tax in case your belongings exceed the exemption. However the step-up could make an enormous distinction within the after-tax inheritance your youngsters obtain.
For high-net-worth households, the step-up is crucial to forestall what may in any other case turn into a 60%+ mixed tax burden.
Even when you 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 a whole lot of 1000’s to thousands and thousands of {dollars} in capital good points taxes.
The step-up is likely one of the most highly effective property planning instruments accessible — and a compelling cause to carry onto appreciated belongings 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 — you have to plan forward to pay the property taxes. Some methods embody:
1. Grantor Retained Annuity Belief (GRAT)
Transfer appreciating belongings 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 belongings (like shares or actual property) right into a short-term, 2-year GRAT. You get annuity funds again, and the long run 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 progress goes to heirs estate-tax free
A Revocable Dwelling Belief Would not Scale back Your Taxes
For these questioning whether or not placing your belongings in a revocable dwelling belief will help you save on property taxes or capital good points taxes — it doesn’t. A revocable dwelling belief is primarily a instrument for avoiding probate, sustaining privateness, and streamlining the distribution of your belongings after demise.
Whereas it does guarantee your heirs obtain the step-up in foundation on appreciated belongings (for the reason that belief continues to be thought-about a part of your property), it doesn’t scale back your property’s worth for property tax functions. The IRS treats belongings in a revocable belief as when you nonetheless personal them outright.
In different phrases, the belief helps with logistics and effectivity — not with decreasing your tax invoice. In case your aim is to decrease your property taxes, you will have to discover different methods, similar to lifetime gifting, irrevocable trusts, or charitable giving, which truly take away belongings 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 decreasing your lifetime exemption. The annual reward restrict tends to go up yearly to account for inflation.
Instance: you and your partner have 2 youngsters and 4 grandchildren. That’s 6 individuals × $19,000 × 2 spouses = $228,000/12 months.
Over 10 years:
- $228,000 × 10 = $2.28 million eliminated out of your property
- These presents 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 youngsters or others now, reasonably than after you are lifeless.
Additional, you are free to provide greater than the reward tax restrict a 12 months if you want. Technically, you are presupposed to file Type 709 when you do. Nonetheless, I do not suppose it issues when you’re means beneath the property tax threshold.
3. Charitable Giving
Donating a part of your property to a charity can scale back your taxable property and help causes you care about. Charitable the rest trusts can present revenue for you and a profit on your heirs, whereas decreasing the tax burden.
Instance: You arrange a Donor Suggested Fund and donate $100,000 a 12 months to your youngsters’s personal college for 10 years. Not solely do you assist your college, you scale back your taxable property by $1,000,000 and get a board seat. In flip, your youngsters get a leg up in moving into the very 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 whenever you die.
That $3 million demise profit can be utilized by your heirs to pay property taxes, so that they don’t must promote belongings.
Professional: Gives tax-free liquidity.
Con: You will need to surrender management of the coverage (however can fund premiums by way of gifting).
5. Charitable The rest Belief (CRT)
Place appreciated belongings right into a CRT. You obtain revenue for all times, and whenever 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 as we speak (~$1.5–2M)
- Keep away from capital good points on sale of inventory contained in the belief
- Reduces taxable property by $5M
Professional: Provides you revenue, avoids capital good points, helps charity
Con: Your heirs don’t obtain the donated asset
6. Household Restricted Partnership (FLP)
Put belongings into an FLP and reward minority pursuits to relations. As a result of these pursuits lack management and marketability, the IRS permits you to low cost their worth by 20–35%.
Instance:
- Transfer $20M into an FLP
- Present 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 decreasing taxable property
Con: IRS scrutinizes reductions — have to be carried out fastidiously
7. Relocate To A Decrease Tax State Or Nation
Lastly, it’s possible you’ll need to think about 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 finally your heirs—may save thousands and thousands of {dollars} in taxes.
Now, when you’re a multi-millionaire fascinated about shifting to a different nation to keep away from property taxes, consider: there’s no escaping the federal property tax in case your property exceeds the exemption threshold. Even when you’ve lived overseas for many years, so long as you’re a U.S. citizen, your whole worldwide property stays topic to U.S. federal property tax upon your demise.
Nonetheless, when you formally resign your U.S. citizenship, the principles change. You’ll now not owe U.S. property tax on non-U.S. belongings—solely on U.S.-situs belongings like actual property and U.S. shares. However there’s a catch: in case your internet price exceeds $2 million, or when you 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 belongings as in the event that they had been bought the day earlier than you resign, taxing any unrealized good points above a sure exemption.
Remaining 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 robust instrument that lets your heirs inherit appreciated belongings tax-free. By holding onto your wealth till demise, your heirs obtain a stepped-up value foundation and might keep away from capital good points taxes in the event that they promote. In distinction, when you reward appreciated belongings throughout your lifetime, the recipient inherits your unique value foundation, doubtlessly triggering important capital good points 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 beneficial belongings simply to cowl the tax invoice. The step-up helps, however it’s not an alternative to a considerate property plan. Methods like GRATs, ILITs, and charitable trusts can dramatically scale back and even eradicate your property tax legal responsibility, however provided that you begin planning early.
Additionally consider: not all belongings get a step-up in foundation. Pre-tax retirement accounts like IRAs and 401(ok)s don’t qualify. As an alternative, your heirs will owe peculiar revenue tax once they withdraw the cash—not capital good points.
Your greatest transfer? Discuss to an skilled property planning legal professional. 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 mother and father holding onto their belongings as an alternative of gifting them to you whereas they’re nonetheless alive—due to the step-up in value foundation?
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