Think about spending your life constructing wealth, investing in actual property, shares, or your enterprise, with the hope of leaving a legacy to your youngsters. Then at some point, you end up questioning: Will the federal government take an enormous chunk of it anyway?
In case your property is effectively above the federal property tax exemption threshold — $30 million for a married couple in 2026 beneath the OBBBA — you could be asking a really reliable query:
“What’s the purpose of the step-up in foundation if my property nonetheless owes tens of millions in property taxes?”
Conversely, in case your property is effectively beneath the federal property tax exemption threshold, you may additionally ask the extra widespread query:
“What’s the good thing about the step-up in foundation if I will not be paying the dying 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 dying. Nonetheless, like several 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 truly works. I’ll clarify it with three examples, so that you’ll stroll away understanding why the step-up in foundation nonetheless issues and why property tax planning turns into essential 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 complete worth of your property at dying, in case your property exceeds the federal exemption. This tax is paid by the property.
2. Capital Beneficial properties Tax – a tax on the appreciation of property, however provided that these property are bought. This tax is paid by your heirs.
When somebody dies, their heirs get a step-up in price foundation on inherited property. Meaning the asset’s price foundation is reset to the truthful market worth (FMV) on the date of dying. The capital positive factors from the decedent’s lifetime are basically worn out.
For those who’re on the lookout for a monetary purpose to carry onto your shares, actual property, and different property indefinitely, the step-up in price foundation is a compelling one. As an alternative of promoting your property, do what billionaires do, and borrow towards them.
I used to suppose it was wasteful for buyers to by no means promote and revel in a greater life alongside the best way. However it seems, by no means promoting could be the best reward you can depart your grownup youngsters.
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 major residence. You each go away, and your two youngsters inherit the property.
Capital Beneficial properties Tax:
Usually, in case your youngsters bought that home with a $49 million achieve, they’d owe capital positive factors 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 dying, they owe zero capital positive factors 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 pa!
Effectively, not fairly.
Property Tax:
However you’re not off the hook solely. As a result of your property is value $50 million (you don’t have 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 needs to be paid earlier than the heirs get the property — and it’s paid out of the property itself.
So the executor (maybe your youngsters) both:
- Need to 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 realize you may have a big, illiquid property, it’s essential to plan forward to determine the best way to 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 children inherit your $50M home with a $1M price foundation. Now the full taxes owed are:
• Property tax: $8.8 million
• Capital positive factors 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 complete tax burden drops to only the $8.8 million property tax from $20.5 million.
In different phrases, the step-up in price foundation prevents double taxation. It doesn’t make property tax go away — but it surely shields your heirs from additionally having to pay capital positive factors tax on the identical appreciated worth.
Step-up In Foundation vs Property Tax Instance 2: A $40 Million Inventory Portfolio
Let’s say your internet value is in tech shares you acquire within the early 2000s. Possibly you bought into Amazon at $50 a share or invested in a portfolio of personal AI firms. Your portfolio’s now value $40 million, and your price foundation is just $2 million.
If you go away:
- Your heirs obtain the inventory at a stepped-up foundation of $40 million
- In the event that they promote instantly, they owe no capital positive factors tax
- But when your complete property (together with different property) exceeds the exemption, they’ll nonetheless face property tax on the quantity over the brink
Let’s say your property is $45 million, and also you’re married. With a $25 million exemption on the time of dying, the taxable property is $20 million, equaling an property tax of $8 million.
Once more, the step-up doesn’t prevent from the property tax, but it surely saves your heirs from owing capital positive factors tax on $38 million in positive factors, which might have been one other $9 million or so.
Step-Up in Foundation Instance 3: A $4 Million Rental Property
Let’s say you acquire a rental property 30 years in the past for $400,000. Over time, its worth has appreciated to $4 million, and it’s now totally paid off. You haven’t any mortgage, and your complete 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 effectively beneath 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 an enormous distinction:
Capital Beneficial properties Tax With out the Step-Up:
For those who gifted the property to your baby whereas alive, they’d inherit your unique $400,000 foundation, not the $4 million truthful market worth. In the event that they later bought it for $4 million, they’d owe capital positive factors tax on $3.6 million of positive factors — seemingly over $850,000 in taxes, relying on their revenue and state.
Then again, should you maintain the property till your dying, then your heirs get a step-up in foundation to the truthful market worth in your date of dying — on this case, $4 million. In the event that they promote instantly, no capital positive factors tax is due.
So paradoxically, doing nothing and holding onto the property till dying is usually 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 Beneficial properties Tax With the Step-Up:
However should you maintain the property till dying, 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 positive factors tax.
Who Pays What Tax?
- Property tax is paid by the property, if owed, earlier than property are distributed.
- Capital positive factors tax is just paid by the heirs in the event that they promote the asset and provided that there’s a achieve past the stepped-up foundation.
On this third instance, as a result of the property is beneath 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 positive factors 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 youngsters obtain.
For high-net-worth households, the step-up is important to stop what may in any other case turn out to be a 60%+ mixed tax burden.
Even should you don’t count on your property to be giant sufficient to set off property tax, the step-up in foundation can nonetheless save your heirs a whole lot of hundreds to tens of millions of {dollars} in capital positive factors taxes.
The step-up is likely one of the most highly effective property planning instruments out there — and a compelling purpose to carry onto appreciated property till dying, particularly in case your purpose is to maximise what you go on.
Actions You Can Take To Cut back Your Property Tax
In case your property is effectively 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. 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 longer term appreciation passes to heirs gift-tax free.
- Switch $2M right into a 2-year GRAT
- Obtain $1M/yr again in annuities
- Asset appreciates 8% yearly
- After 2 years, extra development goes to heirs estate-tax free
A Revocable Residing Belief Does not Cut back Your Taxes
For these questioning whether or not placing your property in a revocable dwelling belief can assist you save on property taxes or capital positive factors taxes — it doesn’t. A revocable dwelling belief is primarily a instrument for avoiding probate, sustaining privateness, and streamlining the distribution of your property after dying.
Whereas it does guarantee your heirs obtain the step-up in foundation on appreciated property (for the reason that belief remains to be thought of 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 should you nonetheless personal them outright.
In different phrases, the belief helps with logistics and effectivity — not with lowering your tax invoice. In case your purpose is to decrease your property taxes, you will must discover different methods, akin to lifetime gifting, irrevocable trusts, or charitable giving, which truly 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 yr to anybody with out lowering your lifetime exemption. The annual reward restrict tends to go up yearly to account for inflation.
Instance: you and your partner have 2 youngsters and 4 grandchildren. That’s 6 folks × $19,000 × 2 spouses = $228,000/yr.
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 effectively beneath the property tax exemption quantity, annual gifting will not make a distinction for property tax discount functions. You have simply determined to assist your youngsters or others now, moderately than after you are useless.
Additional, you are free to present greater than the reward tax restrict a yr if you want. Technically, you are purported to file Kind 709 should you do, however I do not suppose it issues should you’re means beneath 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 lowering the tax burden.
Instance: You arrange a Donor Suggested Fund and donate $100,000 a yr to your youngsters’s non-public 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 youngsters get a leg up in stepping into one of the best highschool and schools.
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 dying profit can be utilized by your heirs to pay property taxes, so that they don’t must promote property.
Professional: Gives 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/yr revenue
- Get a charitable deduction right now (~$1.5–2M)
- Keep away from capital positive factors on sale of inventory contained in the belief
- Reduces taxable property by $5M
Professional: Provides you revenue, avoids capital positive factors, helps charity
Con: Your heirs don’t obtain the donated asset
6. Household Restricted Partnership (FLP)
Put property into an FLP and reward minority pursuits to members of the family. 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 lowering taxable property
Con: IRS scrutinizes reductions — have to be executed fastidiously
7. Relocate To A Decrease Tax State Or Nation
Lastly, chances are you’ll wish to take into account 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 in the end your heirs—may save tens of millions of {dollars} in taxes.
Now, should you’re a multi-millionaire fascinated by transferring to a different nation to keep away from property taxes, be mindful: there’s no escaping the federal property tax in case your property exceeds the exemption threshold. Even should you’ve lived overseas for many years, so long as you’re a U.S. citizen, your whole worldwide property stays topic to U.S. federal property tax upon your dying.
Nonetheless, should you formally resign your U.S. citizenship, the foundations change. You’ll now 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 should you can’t certify 5 years of U.S. tax compliance, you’ll be categorised as a “coated expatriate” and could also be topic to an exit tax beneath IRC Part 877A.
This exit tax treats all of your worldwide property as in the event that they have been bought the day earlier than you resign, taxing any unrealized positive factors above a sure exemption.
Remaining Ideas: The Step-Up in Foundation Helps A Lot
In case your property is beneath the federal exemption, the step-up in foundation stays a robust instrument that lets your heirs inherit appreciated property tax-free. By holding onto your wealth till dying, your heirs obtain a stepped-up price foundation and may keep away from capital positive factors taxes in the event that they promote. In distinction, should you reward appreciated property throughout your lifetime, the recipient inherits your unique price foundation, probably triggering important capital positive factors taxes upon sale.
As soon as your property exceeds the exemption threshold, the federal property tax kicks in. With out correct planning, your heirs might even be pressured to promote precious property simply to cowl the tax invoice. The step-up helps, but it surely’s not an alternative choice to a considerate property plan. Methods like GRATs, ILITs, and charitable trusts can dramatically scale back and even eradicate your property tax legal responsibility, however provided that you begin planning early.
Additionally be mindful: not all property get a step-up in foundation. Pre-tax retirement accounts like IRAs and 401(okay)s don’t qualify. As an alternative, your heirs will owe odd revenue tax after they withdraw the cash—not capital positive factors.
Your greatest transfer? Speak to an skilled property planning legal professional. We’ve, and it made a world of distinction for our peace of thoughts. The step-up might 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 price foundation? Does it make extra sense for extra of us to maintain onto appreciated property till dying and borrow towards them if wanted, moderately than promote and set off capital positive factors taxes?
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