Saving Taxes on Selling a House in the US - Strategy 4: Step-Up Basis

Saving Taxes on Selling a House in the US - Strategy 4: Step-Up Basis

Are you worried that the IRS might come knocking on your door with taxes someday? Yes! Step-Up Basis is here to help.

When an asset is passed down through inheritance, the IRS resets the asset's cost, making it the Fair Market Value (FMV) at the date of the parents' death.

When parents pass a house to their children, the house's cost price becomes its market value at the time of the parents' passing.

For example:

Jim bought a house for $50,000 in 1980 and used a 1031 Exchange method to upgrade his property until his death in 2025 and the house was worth $2.5 million.

When his daughter inherits the house, the cost price is adjusted to $2.5 million.

If the single daughter lives in the house for two years, she will receive an additional $250,000 capital gains tax exemption.

Assuming the daughter sells the house for $2.75 million, there will be no tax. Therefore, the $2.7 million profit across two generations is tax-free.

If the daughter inherits the house and rents it out as an investment property, she can use a 1031 Exchange to buy a larger house without paying taxes.

Then she can pass it on to her descendants, again without paying taxes, creating a tax-free loop – pretty good, right?

This step-up basis applies not only to real estate but also to stocks, bonds, and artwork.

However, it doesn't apply to retirement accounts like 401(k)s or IRAs.

Additionally, the US has an estate tax exemption, which essentially determines how much of your estate you can transfer to your family tax-free.

As of 2025, the estate tax exemption is exceptionally high: $13.99 million can be transferred tax-free to family members upon an individual's death, and double that for married couples.

However, if this law is not continued, the exemption may be halved. If, in 2025, someone uses a step-up basis to transfer assets to family members, as long as the value doesn't exceed $13.99 million, no estate tax will be paid.

If you are the heirs, you don't need to worry about capital gains tax because the cost of assets will be recalculated, making it a very strategy for tax-saving .

If you think the Step-Up Basis method is good, remember to set up a Trust. Write your assets and who will inherit them into the Trust. This way, after your death, the beneficiaries can smoothly inherit your assets through the Trust. In the US, a will has limited effect; you still need to go through the court, and the court will divide or assign the estate. Not only high cost in hiring lawyers, but it's also might have a lot of disputes and can take one to two years—in short, it's exhausting and expensive.

Details matter! You have to pay attention to some points, like, the 45-day and 180-day time limits for 1031 Exchange mean that missing even one day will render the entire process useless. Step-Up Basis needs to be combined with Trust planning; otherwise, you might waste tons of money on litigation.

Our team has many years of experience in personal tax/corporate accounting in the US, managed by professional accountants. We are happy to help you solve any difficulties or questions. Contact Us if you need help.