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Simple English definitions for legal terms
Stepped-up basis
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A quick definition of Stepped-up basis:
Stepped-up basis is a tax rule that looks at the value of assets when someone inherits them, instead of when the previous owner bought them. This helps reduce the amount of taxes someone has to pay when they sell the inherited assets. For example, if someone inherits stocks that are worth more than when they were bought, they only have to pay taxes on the increase in value since they inherited them, not since they were originally bought. This can save a lot of money in taxes.
A more thorough explanation:
Stepped-up basis is a tax policy that determines the value of inherited assets based on their market value at the time of inheritance, rather than the value when the previous owner purchased them. This policy can significantly reduce the amount of capital gains taxes owed by the inheritor when they sell the assets.
For example, let's say John bought 100 shares of ABC Co. for $10 each. When he passed away, Sarah inherited the shares, which were worth $20 each at the time. Five years later, Sarah decides to sell the shares, and they are now worth $30 each. Under the stepped-up basis policy, Sarah would only have to pay capital gains taxes on the $10 increase in value since she inherited the shares ($30 - $20 = $10). Without the stepped-up basis policy, Sarah would have to pay capital gains taxes on the $20 increase in value since John purchased the shares ($30 - $10 = $20).
Overall, the stepped-up basis policy can be beneficial for those who inherit assets, as it can reduce the amount of taxes owed when they sell those assets.