What Is a ‘Step-Up’ in Basis in Estate Administration?

Let’s say that you have a condominium in New York that’s currently being rented out, and you retired to Florida. You plan to sell the New York condominium within the next year or two, which is in your name, not in the name of a Trust.

However, the question arises if you put it in a Trust and do not sell it, would the condo get the stepped-up basis when your heirs receive the property?  if it were sold after we pass away, asks Market Watch’s recent article entitled, “Will our condo get a step-up in basis if we put it in trust?”

The answer is yes for revocable trusts and most irrevocable trusts.

Trusts can be beneficial for out-of-state property to avoid two probate processes upon the death of the owners, one in their state of residence and one where the out-of-state property is located. These are usually revocable trusts. Irrevocable trusts may be used for other purposes, such as asset protection.

The “step-up” in basis relates to the calculation of the capital gains on the sale of property. The capital gain is the difference between net proceeds on sale and the basis. The initial basis is the purchase price of the property plus the cost of any capital improvements added to it.

So, for instance, if you paid $500,000 for your condominium and spent $100,000 replacing the kitchen, the basis would be $600,000. If you sold the apartment for $1 million, your capital gain would be $400,000.

The step-up in basis is another adjustment that occurs when an owner dies. At that time, the basis is adjusted to the date-of-death fair market value of the property. This is commonly called a “step-up” in basis because real estate values typically increase over time, so the new basis is typically higher than the old one.

In the example above, if the condo had a fair market value of $1 million upon the death of the owner, that would become the new basis to the owner's heirs. If the property were sold, any capital gain would be only if there was an increase in value after the owner's death.

To receive a step-up in basis on a property upon the death of the owner, it must be in their taxable estate. All property in a revocable trust created by the decedent is in their taxable estate.

Whether an irrevocable trust is in the decedent’s taxable estate depends on how it is drafted. Ask an experienced estate planning attorney to draft an irrevocable trust for estate inclusion and consequently a step-up in basis if that your goal.  We at Curran Estate & Elder Law have vast experience in this area.

Reference: Market Watch (April 7, 2023) “Will our condo get a step-up in basis if we put it in trust?”