Think about spending your life constructing wealth, investing in actual property, shares, or your small business, with the hope of leaving a legacy to your kids. Then someday, you end up questioning: Will the federal government take a large chunk of it anyway?
In case your property is properly above the federal property tax exemption threshold — $30 million for a married couple in 2026 underneath the OBBBA — you could 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 properly under the federal property tax exemption threshold, you may also ask the much more frequent query:
“What’s the advantage of the step-up in foundation if I will not be paying the loss of life tax anyway?”
As a result of I am not useless but, I have never been centered an excessive amount of on the property tax owed upon loss of life. Nevertheless, 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 via the way it all really 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 whole worth of your property at loss of life, 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 property, however provided that these property are offered. This tax is paid by your heirs.
When somebody dies, their heirs get a step-up in value foundation on inherited property. Meaning the asset’s value foundation is reset to the truthful market worth (FMV) on the date of loss of life. The capital features from the decedent’s lifetime are primarily worn out.
For those who’re in search of a monetary motive 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 towards them to incur no capital features tax legal responsibility.
I used to suppose it was wasteful for buyers to by no means promote and revel in a greater life with the proceeds alongside the way in which. But it surely seems, by no means promoting could be the best present you might go away 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. Considering in extremes helps you perceive something higher.
Let’s say you and your partner personal a single home value $50 million. You got it a long time in the past for $1 million, and it’s now your main residence. You each cross away, and your two kids inherit the property.
Capital Good points Tax:
Usually, in case your kids offered that home with a $49 million acquire, they’d owe capital features 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 fee foundation resets to $50 million. In the event that they promote the home for $50 million the day after your loss of life, they owe zero capital features 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!
Effectively, not fairly.
Property Tax:
Regardless of being useless, 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 price, 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:
- Should promote half or the entire home to pay the property tax, or
- Use different liquid property within the property (if any) or borrow towards 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 understand you’ve got a big, illiquid property, you need to plan forward to determine 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 youngsters inherit your $50M home with a $1M value foundation. Now the whole taxes owed are:
• Property tax: $8.8 million
• Capital features 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 whole tax burden drops to only 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. But it surely shields your heirs from additionally having to pay capital features 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 value is usually tied up in tech shares you obtain within the early 2000s. Possibly you bought into Amazon at $50 a share or invested early in a basket of personal AI firms. Now, your portfolio is value $45 million, however your value foundation is barely $2 million.
While 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 features tax
- Nevertheless, in case your whole property (together with different property) exceeds the federal exemption, they’ll nonetheless face property tax on the quantity over the brink
Let’s say your whole property is value $45 million and also you’re married. Assuming you’ve correctly elected portability and the mixed federal property tax exemption on the time of loss of life is $25 million, your taxable property could be $20 million. At a 40% property tax price, the property would owe roughly $8 million. This tax should 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 really obtain after taxes. So in the event that they promote the property for $45 million, they’ll owe zero capital features tax as a result of their value foundation has been reset to the truthful market worth on the time of loss of life.
With out the step-up, they’d inherit your unique value foundation of $2 million. In the event that they offered the portfolio for $45 million, they’d owe capital features tax on $43 million in unrealized features. On the 23.8% federal long-term capital features price, that’s over $10 million in potential tax — on prime of the $8 million in property tax.
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 don’t have any mortgage, and your whole property—together with this property, some retirement financial savings, and different property—is value $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 properly under the taxable threshold. Meaning no property tax is due—your heirs get all the pieces 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 little one whereas alive, they’d inherit your unique $400,000 foundation, not the $4 million truthful market worth. In the event that they later offered it for $4 million, they’d owe capital features tax on $3.6 million of features. That is seemingly over $850,000 in taxes, relying on their revenue and state.
Alternatively, for those who maintain the property till your loss of life, then your heirs get a step-up in foundation to the truthful market worth in your date of loss of life — on this case, $4 million. In the event that they promote instantly, no capital features tax is due.
So sarcastically, doing nothing and holding onto the property till loss of life is commonly essentially 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 Good points Tax With the Step-Up:
However for those who maintain the property till loss of life, the premise 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 features tax.
Who Pays What Tax?
- Property tax is paid by the property, if owed, earlier than property are distributed.
- Capital features tax is barely paid by the heirs in the event that they promote the asset and provided that there’s a acquire past the stepped-up foundation.
On this third instance, as a result of the property is under 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 features 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 crucial to stop what may in any other case change into a 60%+ mixed tax burden.
Even for those who 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 hundreds to thousands and thousands of {dollars} in capital features taxes.
The step-up is among the most highly effective property planning instruments obtainable — and a compelling motive to carry onto appreciated property till loss of life, 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 properly 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 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 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 development goes to heirs estate-tax free
A Revocable Dwelling Belief Does not Scale back Your Taxes
For these questioning whether or not placing your property in a revocable dwelling belief might help you save on property taxes or capital features taxes — it doesn’t. A revocable dwelling belief is primarily a software for avoiding probate, sustaining privateness, and streamlining the distribution of your property after loss of life.
Whereas it does guarantee your heirs obtain the step-up in foundation on appreciated property (because the belief remains 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 property in a revocable belief as for those who 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 may have to discover different methods, corresponding to lifetime gifting, irrevocable trusts, or charitable giving, which really take away property out of your taxable property.
2. Annual Gifting
You and your partner can provide as much as $19,000 (2025) per particular person, per 12 months to anybody with out decreasing 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 properly under 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, fairly than after you are useless.
Additional, you are free to present greater than the present tax restrict a 12 months if you want. Technically, you are alleged to file Type 709 for those who do. Nevertheless, I do not suppose it issues for those who’re manner under the property tax threshold.
3. Charitable Giving
Donating a part of your property to a charity can scale 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 decreasing the tax burden.
Instance: You arrange a Donor Suggested Fund and donate $100,000 a 12 months to your kids’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 kids get a leg up in moving into the very best highschool and faculties.
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 while you die.
That $3 million loss of life profit can be utilized by your heirs to pay property taxes, in order that they don’t should promote property.
Professional: Supplies tax-free liquidity.
Con: You could quit 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 while 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 features on sale of inventory contained in the belief
- Reduces taxable property by $5M
Professional: Provides you revenue, avoids capital features, 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
- 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 — should be completed rigorously
7. Relocate To A Decrease Tax State Or Nation
Lastly, you could wish 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, for those who’re a multi-millionaire fascinated with 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 for those who’ve lived overseas for many years, so long as you’re a U.S. citizen, your complete worldwide property stays topic to U.S. federal property tax upon your loss of life.
Nevertheless, for those who formally surrender your U.S. citizenship, the foundations 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 for those who can’t certify 5 years of U.S. tax compliance, you’ll be categorized as a “lined expatriate” and could also be topic to an exit tax underneath IRC Part 877A.
This exit tax treats all of your worldwide property as in the event that they had been offered the day earlier than you surrender, taxing any unrealized features above a sure exemption.
Ultimate Ideas: The Step-Up in Foundation Helps A Lot
In case your property is underneath the federal exemption, the step-up in foundation stays a strong software that lets your heirs inherit appreciated property tax-free. By holding onto your wealth till loss of life, your heirs obtain a stepped-up value foundation and may keep away from capital features taxes in the event that they promote. In distinction, for those who present appreciated property throughout your lifetime, the recipient inherits your unique value foundation, doubtlessly triggering important capital features 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 pressured to promote helpful property simply to cowl the tax invoice. The step-up helps, but it surely’s not an alternative to a considerate property plan. Methods like GRATs, ILITs, and charitable trusts can dramatically scale back and even get rid of your property tax legal responsibility, however provided that you begin planning early.
Additionally consider: 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 bizarre revenue tax once they withdraw the cash—not capital features.
Your greatest transfer? Discuss to an skilled property planning legal professional. We have now, 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 remains to be ready with one other.
Readers, are you now much less upset about your rich dad and mom holding onto their property as a substitute of gifting them to you whereas they’re nonetheless alive—because of the step-up in value foundation?
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