Think about spending your life constructing wealth, investing in actual property, shares, or your small business, with the hope of leaving a legacy to your kids. Then sooner or later, 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 underneath the OBBBA — you could be asking a really reputable query:
“What’s the purpose of the step-up in foundation if my property nonetheless owes thousands and thousands in property taxes?”
Conversely, in case your property is effectively under 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 by way of the way it all really 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 completely different taxes in play when somebody dies:
1. Property Tax – a tax on the complete worth of your belongings 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 belongings, however provided that these belongings are bought. This tax is paid by your heirs.
When somebody dies, their heirs get a step-up in price foundation on inherited belongings. Which means the asset’s price foundation is reset to the honest market worth (FMV) on the date of dying. The capital features from the decedent’s lifetime are primarily worn out.
Should you’re searching for a monetary motive to carry onto your shares, actual property, and different belongings indefinitely, the step-up in price foundation is a compelling one. As a substitute of promoting your belongings, do what billionaires do, and borrow in opposition to them.
I used to suppose it was wasteful for traders to by no means promote and luxuriate in a greater life alongside the way in which. But it surely seems, by no means promoting could be the best present you might go away your grownup kids.
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 price $50 million. You purchased it many years in the past for $1 million, and it’s now your major residence. You each cross away, and your two kids inherit the property.
Capital Beneficial properties Tax:
Usually, in case your kids bought that home with a $49 million acquire, they’d owe capital features 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 price 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 features 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 pop!
Properly, not fairly.
Property Tax:
However you’re not off the hook totally. As a result of your property is price $50 million (you don’t have any different belongings 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 fee, that’s a $8.8 million property tax invoice. Ouch.
And right here’s the important thing level: the property tax comes first. It must be paid earlier than the heirs get the property — and it’s paid out of the property itself.
So the executor (maybe your kids) both:
- Must promote half or all the home to pay the property tax, or
- Use different liquid belongings within the property (if any) or borrow in opposition to the home
- Borrow In opposition to 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 already know you might have a big, illiquid property, you will need to plan forward to determine tips on how 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 way 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 whole taxes owed are:
• Property tax: $8.8 million
• Capital features 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 simply 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 — however it shields your heirs from additionally having to pay capital features 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 price 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 price $40 million, and your price foundation is simply $2 million.
Whenever you cross away:
- Your heirs obtain the inventory at a stepped-up foundation of $40 million
- In the event that they promote straight away, they owe no capital features tax
- But when your complete property (together with different belongings) 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, however it saves your heirs from owing capital features tax on $38 million in features, 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 don’t have any mortgage, and your complete property—together with this property, some retirement financial savings, and different belongings—is price $5 million.
Because the 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 under the taxable threshold. Which means no property tax is due—your heirs get the whole lot 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:
Should you gifted the property to your baby whereas alive, they’d inherit your authentic $400,000 foundation, not the $4 million honest market worth. In the event that they later bought it for $4 million, they’d owe capital features tax on $3.6 million of features — probably over $850,000 in taxes, relying on their revenue and state.
Alternatively, when you maintain the property till your dying, then your heirs get a step-up in foundation to the honest market worth in your date of dying — on this case, $4 million. In the event that they promote straight away, no capital features tax is due.
So paradoxically, doing nothing and holding onto the property till dying is commonly probably the most tax-efficient technique. So maybe your boomer dad and mom aren’t so grasping in any case for not serving to you extra whereas alive.
Capital Beneficial properties Tax With the Step-Up:
However when you maintain the property till dying, the premise is stepped as much as the $4 million honest market worth. Your heirs can then promote it for $4 million the day after inheriting it and owe zero capital features tax.
Who Pays What Tax?
- Property tax is paid by the property, if owed, earlier than belongings are distributed.
- Capital features tax is simply paid by the heirs in the event that they promote the asset and provided that there’s a acquire past the stepped-up foundation.
On this third instance, as a result of the property is under 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 Reward — However It’s Not a Defend
Consider the step-up in foundation as a forgiveness of capital features tax, however not a full pardon from all taxes.
You’re nonetheless topic to the property tax in case your belongings exceed the exemption. However the step-up could make an enormous distinction within the after-tax inheritance your kids obtain.
For high-net-worth households, the step-up is crucial to stop what might in any other case change into a 60%+ mixed tax burden.
Even when you don’t anticipate your property to be massive sufficient to set off property tax, the step-up in foundation can nonetheless save your heirs tons of of 1000’s to thousands and thousands of {dollars} in capital features taxes.
The step-up is among the most highly effective property planning instruments accessible — and a compelling motive to carry onto appreciated belongings till dying, particularly in case your purpose is to maximise what you cross 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 — it is advisable to plan forward. Some methods embrace:
1. Grantor Retained Annuity Belief (GRAT)
Transfer appreciating belongings 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 belongings (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 progress goes to heirs estate-tax free
A Revocable Dwelling Belief Would not Cut back Your Taxes
For these questioning whether or not placing your belongings in a revocable dwelling belief might help you save on property taxes or capital features taxes — it doesn’t. A revocable dwelling belief is primarily a instrument for avoiding probate, sustaining privateness, and streamlining the distribution of your belongings after dying.
Whereas it does guarantee your heirs obtain the step-up in foundation on appreciated belongings (for the reason that belief continues 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 belongings in a revocable belief as when 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 have to discover different methods, reminiscent of lifetime gifting, irrevocable trusts, or charitable giving, which really take away belongings out of your taxable property.
2. Annual Gifting
You and your partner can provide as much as $19,000 (2025) per individual, per yr to anybody with out lowering your lifetime exemption. The annual present restrict tends to go up yearly to account for inflation.
Instance: you and your partner have 2 kids and 4 grandchildren. That’s 6 individuals × $19,000 × 2 spouses = $228,000/yr.
Over 10 years:
- $228,000 × 10 = $2.28 million eliminated out of your property
- These presents additionally shift appreciation out of your property, compounding the profit
In case your property is effectively under the property tax exemption quantity, annual gifting will not make a distinction for property tax discount functions. You’ve got simply determined to assist your kids or others now, fairly than after you are useless.
Additional, you are free to offer greater than the present tax restrict a yr if you want. Technically, you are alleged to file Kind 709 when you do, however I do not suppose it issues when you’re approach under 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 kids’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 kids get a leg up in moving 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 if you die.
That $3 million dying profit can be utilized by your heirs to pay property taxes, so that they don’t need to promote belongings.
Professional: Offers tax-free liquidity.
Con: You could quit management of the coverage (however can fund premiums by way of gifting).
5. Charitable The rest Belief (CRT)
Place appreciated belongings right into a CRT. You obtain revenue for all times, and if 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 at this time (~$1.5–2M)
- Keep away from capital features on sale of inventory contained in the belief
- Reduces taxable property by $5M
Professional: Provides you revenue, avoids capital features, helps charity
Con: Your heirs don’t obtain the donated asset
6. Household Restricted Partnership (FLP)
Put belongings into an FLP and present minority pursuits to members of the family. As a result of these pursuits lack management and marketability, the IRS permits you to low cost their worth by 20–35%.
Instance:
- Transfer $20M into an FLP
- Reward 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, you might 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. Should you can efficiently set up residency, your property—and finally your heirs—might save thousands and thousands of {dollars} in taxes.
Now, when you’re a multi-millionaire excited about transferring to a different nation to keep away from property taxes, bear in mind: there’s no escaping the federal property tax in case your property exceeds the exemption threshold. Even when you’ve lived overseas for many years, so long as you’re a U.S. citizen, your complete worldwide property stays topic to U.S. federal property tax upon your dying.
Nonetheless, when you formally resign your U.S. citizenship, the principles change. You’ll not owe U.S. property tax on non-U.S. belongings—solely on U.S.-situs belongings like actual property and U.S. shares. However there’s a catch: in case your internet price exceeds $2 million, or when 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 underneath IRC Part 877A.
This exit tax treats all of your worldwide belongings as in the event that they had been bought the day earlier than you resign, taxing any unrealized features above a sure exemption.
Closing Ideas: The Step-Up in Foundation Helps A Lot
In case your property is underneath the federal exemption, the step-up in foundation stays a robust instrument that lets your heirs inherit appreciated belongings tax-free. By holding onto your wealth till dying, your heirs obtain a stepped-up price foundation and might keep away from capital features taxes in the event that they promote. In distinction, when you present appreciated belongings throughout your lifetime, the recipient inherits your authentic price foundation, doubtlessly triggering important capital features taxes upon sale.
As soon as your property exceeds the exemption threshold, the federal property tax kicks in. With out correct planning, your heirs could even be compelled to promote priceless belongings simply to cowl the tax invoice. The step-up helps, however it’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 bear in mind: not all belongings get a step-up in foundation. Pre-tax retirement accounts like IRAs and 401(ok)s don’t qualify. As a substitute, your heirs will owe unusual revenue tax once they withdraw the cash—not capital features.
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 could save your heirs from one tax, however the IRS continues to be ready with one other.
Readers, are you now much less upset about your rich dad and mom holding onto their belongings as an alternative 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 belongings till dying and borrow in opposition to them if wanted, fairly than promote and set off capital features taxes?
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