Step-Up In Basis

Your great-uncle bought a decrepit old building in the downtown area of your town in 1973 for $50,000. Since then, a lot has changed. They've closed down the adult movie theaters and the drug houses that were in the neighborhood, and moved in the hipster coffee bars and sushi restaurants. The building he bought all those decades ago is now worth about $2 million.

Your great-uncle dies and leaves you the building. Time to assess values for taxes. Now your uncle bought the building for $50,000...and something is worth what someone is willing to pay for it, right? So, when the taxman comes looking, the building should be worth $50,000, right?

Luckily, it usually doesn't work like that. If you tried to sell the building for $2 million after inheriting it with an initial value basis of $50,000, you'd have a huge capital gains tax to pay.

Here's where step-up in basis comes in. The concept refers to a situation where the value of an asset is readjusted for inheritance. It happens when the value of the asset has appreciated since it was purchased. So...the building gets assessed at the $2 million market value it had when your uncle died, instead of what he paid back in the '70s.