What are common mistakes with stepped-up basis?

What is the tax loophole for inherited property?

The main rule helping avoid capital gains tax on inherited property is the "Step-Up in Basis," which resets the property's cost basis to its fair market value at the time of the owner's death, drastically reducing potential gains if sold quickly. Another strategy is using the Section 121 exclusion by living in the home for two of the last five years before selling, excluding up to $250k/$500k of gain. 

What is the most tax-efficient way to leave a home to a child?

The most tax-efficient way to leave a home to a child usually involves leaving it in your will for them to inherit, which qualifies for a stepped-up tax basis (reducing capital gains tax if sold) and avoids immediate gift taxes, though trusts (like Revocable Living Trusts for probate avoidance or QPRTs for advanced planning) or Transfer-on-Death (TOD) deeds (where available) offer control and probate avoidance, while outright gifting is generally less tax-efficient due to inherited basis issues. Consulting an estate planning attorney is crucial to choose the best method for your specific situation. 

How to avoid capital gains on inherited property?

Inheriting property in California comes with financial opportunities and responsibilities. By leveraging the stepped-up basis, selling strategically, or using tax-saving tools like the principal residence exclusion or a 1031 exchange, you can minimize or avoid capital gains taxes.

What are the biggest mistakes people make with their will?

“The biggest mistake people make with doing their will or estate plan is simply not doing anything and having no documents at all. For those people who have documents, the next biggest mistake people make is to let the documents get stale.

How long does the executor of a will have to settle an estate?

Executors may have anywhere from a few weeks to a few years to transfer property after death. The time it takes to transfer the property depends on what type of property deed is involved and whether the estate must go through the probate process.

What records are needed for stepped-up basis?

Keep good records: Knowing the original cost basis helps confirm the step-up amount with the IRS. Get a professional appraisal: Especially for real estate, an appraisal at the time of inheritance can help document the fair market value.

What is the angel of death loophole?

As policymakers search for equitable and efficient ways to address the large looming federal deficits, one option should top their list: closing the “Angel of Death” loophole. This refers to the fact that if a person dies holding assets with capital gains, the increase in the asset value escapes the income tax.

What assets do not get a step-up in basis at death?

Some assets do not receive a step-up in cost basis on the owner's death. These include retirement accounts, IRAs, annuities, or assets held in an irrevocable trust, for example. However, when a lifetime gift is made, the recipient of the gift generally inherits the original cost basis of the property.

Is appraisal required for stepped-up basis?

Estate appraisals are essential for establishing a stepped-up basis, which is the property's market value at the time of the owner's death. This stepped-up basis determines the capital gains tax owed if/when heirs eventually sell inherited property.

What are the 5 D's of succession planning?

The 5 Ds of succession planning are Death, Disability, Divorce, Disagreement, and Distress, representing major life events and business challenges that can force an owner out and disrupt business continuity, making proactive planning for these unexpected scenarios crucial for long-term stability and value protection. By addressing these common triggers, businesses build resilience through documented agreements, clear processes, and robust insurance, safeguarding operations and leadership transitions.
 

Do beneficiaries pay tax on estate income?

No, beneficiaries generally don't pay federal income tax on the inheritance itself (cash or property), but they do pay tax on income generated by the inheritance (like interest or dividends) or on distributions from pre-tax retirement accounts (like traditional IRAs/401(k)s). The estate pays the estate tax if assets exceed a very high federal limit, and some states have their own inheritance tax. 

What are the six worst assets to inherit?

The 6 worst assets to inherit often involve complexity, ongoing costs, or legal headaches, with common examples including Timeshares, Traditional IRAs (due to taxes), Guns (complex laws), Collectibles (valuation/selling effort), Vacation Homes/Family Property (family disputes/costs), and Businesses Without a Plan (risk of collapse). These assets create financial burdens, legal issues, or family conflict, making them problematic despite their potential monetary value.
 

What is the 7 year rule for inheritance?

The "7-year inheritance rule" (primarily a UK concept) means gifts you give away become exempt from Inheritance Tax (IHT) if you live for seven years or more after making the gift; if you die within that time, the gift may be taxed, often with a reduced rate (taper relief) applied if you die between years 3 and 7, but at the full 40% if you die within 3 years, helping people reduce their estate's taxable value by giving assets away earlier.
 

How do you make assets untouchable?

If you already have some legal experience, you might see how an asset protection trust is excellent for protecting assets from litigation and creditors. By removing ownership of the valuable assets in question away from you and your immediate family members, you make those assets practically untouchable…

What is the ultimate inheritance tax trick?

The catchily-titled “normal expenditure out of income exemption” rule means that gifts made regularly out of normal monthly income, which do not reduce your standard of living, could escape the risk of later being subject to inheritance tax.

What is the loophole for capital gains inheritance?

The Step-Up in Basis loophole is used to circumvent capital gains taxes, or to pay the least amount of this type of inheritance tax as is legally possible. This loophole can be used on inherited assets that have appreciated in value from the time they were purchased.

Is it better to gift or inherit property?

Generally, from a tax perspective, it is more advantageous to inherit a home rather than receive it as a gift before the owner's death.

What is the best way to give my house to my son?

Here are four potential options you may want to consider:

1. Leave the House in Your Will. The simplest way to give your house to your children is to leave it to them in your will. ...
2. Gift the House. ...
3. Sell Your Home. ...
4. Put the House in a Trust.

What is the best way to transfer my property to my son?

The best way to transfer property to your son depends on your goals, but a living trust often offers the best balance, avoiding probate and potentially minimizing taxes while retaining control, while gifting outright can trigger large capital gains taxes later, and leaving it in a will is common but involves probate. Other options include a Transfer-on-Death (TOD) deed (if available in your state), a gift deed, or selling it, but each has unique tax (capital gains, gift tax) and legal implications, so consulting an estate planning attorney is crucial. 

How much can you gift to a family member tax free?

You can gift a family member up to $19,000 per person in 2025 (and likely 2026) tax-free, without needing to report it to the IRS. Married couples can combine this to gift $38,000 per recipient. Gifts exceeding this amount count against your lifetime gift tax exemption, which is substantial (around $13.99 million in 2025), but you must file IRS Form 709 to report them, notes the TaxAct website.