Whether you own a prime piece of Los Gatos real estate or have lived in your San Jose luxury home for decades, homeowners who have been widowed can benefit tremendously from the stepped-up basis — a tax break that simultaneously honors the deceased and behooves their survivors.
Read on for the acclaimed Poncetta Real Estate Group’s explanation of how it works and whether it may be available to you in the wake of your loss.
WHAT ARE THE BASICS OF THE STEPPED-UP BASIS?
The stepped-up basis, or “step-up in cost basis,” as it’s technically called, is an industry term that refers to the alteration in the value of a property after a homeowner’s death. Simply put, it’s a tax provision in which the cost basis, or value of an estate, is factored not on its present market value but on the value it held at the time of the homeowner’s passing.
For widows who have acquired the estate after their spouse’s death, it can be a boon in terms of taxes owed upon the sale of the property — if, of course, you’re aware that the stepped-up basis is available. Read on to find out how it works.
WHAT DOES THE STEPPED-UP BASIS LOOK LIKE IN PRACTICE AND THEORY?
Let’s place the stepped-up basis in context and examine it on a deeper level.
Say you and your husband have owned your San Jose home for 17 years. If you jointly own the home and possess the right of survivorship, as designated in the property’s title, you will assume full ownership of the property upon his death, should he pass before you. This is a common situation that protects the survivor, and the transfer of assets can be clean — meaning there are no probate complexities or death taxes on either the state or federal level. What you choose to do with the property after his death is up to you as the heir.
Taxes will continue to have to be paid upon your partner’s passing and in the event that you choose to sell the property. What you may not realize, though, is that these taxes may be calculated based on the highest fair market value of the property upon your spouse’s death rather than, say, its value five to ten years into the future.
You may be asking, why is this relevant?
Should you choose to sell the home at a later date, chances are high that the home will have climbed in value, particularly if you live in the ultra-coveted San Francisco Bay Area, the glorious Silicon Valley, or the equally desirable Santa Cruz region.
According to the stepped-up basis, when you sell, the taxes that may be owed will be based not on the property’s present value but, again, on the highest fair market value of the home when your husband passed. This omits the “capital gain” of the property between the time of the purchase and your acquisition of the property, which can minimize the amount of taxes owed. For luxury homeowners, it could potentially save the surviving spouse millions of dollars.
This stepped-up basis isn’t the sole provenance of one’s primary residence or other real estate, either. It is also applied to all property — including other assets that you may have “inherited” upon your spouse’s death, including valuables and collectibles, mutual funds, bonds, stocks, and other “tangible” assets. With these, too, the capital gains taxes will be based on the value of these assets at the time of the descendant’s death — not on its present market value. Overall, this is referred to as the date of death estate valuation.
When it comes to real estate, bear in mind that the cost basis is based on the original price paid for the estate plus any monies that have been invested into the home, such as maintenance, renovations, and repairs. It’s also important to remember that the value of the property may have declined since its purchase or your spouse’s death. If this is the case, the “step-down basis” may be applied.
Alas, this tax adjustment is all too often missed by the surviving spouse — and yet, it can be crucial and useful should you choose to add your property to the list of homes for sale in Silicon Valley or have just begun weighing the notion of downsizing to a smaller, more manageable, but no less beautiful home, condominium, or townhome.
WHAT SHOULD I DO IF I’M A CANDIDATE FOR THE STEPPED-UP BASIS?
If you believe that your home or other assets have increased or decreased in value since the time of your spouse’s passing, it’s vital to speak with your attorney, accountant, tax advisor, or CPA (essentially, the legal and financial professionals in your life). The stepped-up basis is listed in the Internal Revenue Code section 1014e.
The expert you have in your corner will take into account community property laws if you live in one of the nine states that have it, wherein assets owned by a married couple are legally designated as “community property” and therefore belong to both parties of a marriage. These states include:
- California
- Arizona
- Nevada
- Wisconsin
- Louisiana
- New Mexico
- Idaho
- Washington
- Texas
Additionally, discuss with your financial or legal expert to discover how Prop 19, which was passed in 2020, affects your circumstances — and whether it might be a prime, if not sublime, time to sell the residence you inherited after your partner’s passing.
WHAT IS A STEP-UP BASIS IN AN IRREVOCABLE TRUST?
When discussing the step-up basis in the context of an irrevocable trust, it’s crucial to understand how this tax provision operates within estate planning and asset management.
1. Asset Transfer into Trust: Initially, assets are transferred into an irrevocable trust, removing them from the grantor’s (original owner’s) taxable estate. This action itself has various tax implications and benefits, depending on the asset type and trust structure.
2. Adjustment of Cost Basis: Upon the death of the original owner (grantor), the cost basis of the trust-held assets is ‘stepped up’ to their current market value. This step-up can substantially reduce the capital gains tax liability when these assets are sold later.
3. Implications for Beneficiaries: Beneficiaries of the trust, often family members, will inherit these assets at the stepped-up basis. If they choose to sell the assets, the taxable gain is calculated based on the difference between the sale price and the stepped-up basis, not the original purchase price.
If you happen to be a widow and are considering selling your home or purchasing a new residence, Scott Poncetta at the Poncetta Real Estate Group would be delighted to assist.
With two-plus decades as a top Silicon Valley real estate agent, he brings a savvy and refreshing combination of compassion, candor, expertise, and enthusiasm to the table. He always puts his client’s best interests first, whether they’re investing in a vacation property or searching for their forever home. He also has an in-depth understanding of widowers’ needs in the wake of their spouse’s death and advises according to their needs and wishes. Schedule a consultation with him today to realize all of your real estate goals and to receive the guidance you seek.
