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Step-Up in Basis Explained: What is Stepped-Up Cost Basis? - YouTube
Channel: Your Money, Your Wealth
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Hi, my name is Peter Keller, a CERTIFIED FINANCIAL
PLANNER™ with Pure Financial Advisors and
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this week we received a call from a client
on what is a step-up in basis? It's a great
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question and here's how it works:
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Typically when you have an asset, a capital
asset - and that can be defined as a stock,
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bond, mutual fund, real estate, any kind of
appreciating asset - when you make an investment
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in that asset, you have what is called basis.
And let's use an example where we have $100,000
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as the basis, and let's say this asset, whatever
it is, stock, bond, mutual fund, appreciates
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in value to $500,000. That means you would
then have a gain of $400,000. Now when an
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individual passes away with this appreciated
asset, the beneficiary gets this assets stepped
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up to the fair market value, which means the
beneficiary can now sell this and pay zero
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in capital gains tax.
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Now let's say in another scenario that this
is a married couple and we have a couple of
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different options in that scenario. So starting
off with the same basis again in this appreciating
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asset, we've got $50,000 as cost basis for
one spouse and $50,000 of cost basis for the
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other spouse. Again it appreciates to $500,000
in value. And that means this spouse has a
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$200,000 gain, and this spouse has a $200,000
gain. If the asset was held as joint tenants
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with rights of survivorship and one spouse
passes away, all of this is basis, so there's
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no capital gains tax, and this half would
get stepped up for the deceased spouse. And
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then the surviving spouse, if they wanted
to sell this asset, they would then pay capital
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gains tax on $200,000.
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Now if we take it one step further with step
up and basis on community property it works
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a little bit different. So again, you have
the same basis of $50,000 for each spouse
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because that's the starting value, and that
asset appreciated in value to $500,000. And
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again, it's $200,000 of gain for each spouse.
And with community property, when one spouse
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passes away, the whole asset gets stepped
up to the fair market value, and the surviving
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spouse can sell this asset without paying
any capital gains tax.
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So that's cost basis stepped up explained.
For further questions or comments, please
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contact us at Pure Financial Advisors.
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