What is the Step-Up in Basis Rule in Illinois?

 Posted on December 20, 2024 in Estate Planning

When someone passes away, anything they own can be passed down to heirs of their choosing. Their real estate, stocks, or other investments can all be included as part of an inheritance. While it is wonderful to leave assets behind for others, beneficiaries are sometimes left with a significant tax burden as a result. 

The "step-up in basis" rule aims to help heirs so that they are not punished for being left with assets and property when a loved one passes away. It can make a big difference in estate planning, especially when families own homes, farms, or other valuable assets. To learn more about how the step-up in basis rule might apply to your situation, speak with a qualified Lombard, IL estate planning attorney.

What is "Basis" in Estate Planning?

To understand the step-up in basis rule, you first need to know what "basis" means. The basis is the original cost of a property or asset, including any improvements that have been made since it was purchased. For example, if you bought a house for $100,000 and later spent $50,000 on renovations, your basis in that house is $150,000. If you sell the house, you will owe taxes on the profit above the basis. If the house later sells for $300,000, the profit – or "capital gain" – is calculated based on the value you put into the house ($100,000 to buy it + $50,000 to renovate it = $150,000). The capital gain would be $150,000, and that is the amount subject to taxes.

What is the Step-Up in Basis Rule?

If you inherit property, the basis of that property is "stepped up" to its value at the time of the original owner's death. This means that the starting point, or basis, for calculating capital gains is much higher. 

Take for example the house mentioned above. If your father bought the house for $150,000, spent $50,000 on it, and it was worth $300,000 when he died and left it for you as an inheritance, the step-up rule would place the basis at $300,000, not $150,000. If you sell that house for $300,000, there is no taxable profit because the sale price matches the stepped-up basis.

How Can I Benefit From the Step-Up in Basis Rule?

One way to make the most of the step-up in basis rule is by creating a well-structured estate plan. Attorneys with experience helping families in these situations can ensure that assets are passed down in a way that takes full advantage of the rule. For instance, holding property in certain trusts or transferring ownership at the right time can make a big difference.

It is also important to understand when the step-up in basis rule does not apply. Assets like retirement accounts do not get a stepped-up basis. Heirs generally owe taxes on withdrawals from these accounts. Knowing these details can help families make informed decisions about how to plan for the future in a way that optimizes the potential benefits.

Contact a DuPage County, IL Estate Planning Lawyer

Whether you are considering how you want to leave assets behind for your loved ones or you are a named beneficiary for someone else, you should speak with a knowledgeable Wheaton, IL estate planning attorney to understand the implications of the step-up in basis rule. This powerful tool can save families significant money by reducing taxes on inherited property. At A. Traub & Associates, we explain the laws and rules to our clients so they can protect their assets and pass them on with fewer tax burdens. Call 630-426-0196 to schedule a confidential consultation with a member of our team.