Understanding Washington’s Step-Up in Basis for Inherited Assets

When creating an estate plan, most people focus on who will inherit their assets. Just as important, however, is understanding the potential tax consequences of those inheritances.

Every asset has a cost basis, which generally refers to the amount you paid to acquire it. When an asset is then sold, the difference between its cost basis and the sale price determines whether capital gains tax may be owed.

One valuable tax benefit available to many beneficiaries to avoid capital gains tax is the “step-up in basis.” According to Section 1014 of the Internal Revenue Code, some assets owned at death receive a new tax basis equal to their fair market value on the date of the owner’s death. This adjustment often eliminates capital gains tax on any appreciation that occurred during the deceased owner’s lifetime. Common assets that may qualify for a step-up in basis include real property, investment accounts, and stocks.

Although Washington has established its own estate tax scheme, it generally follows the federal rules governing a step-up in basis adjustment for certain types of inherited assets. Paired with Washington’s community property laws, a step-up in basis can provide an additional benefit for married couples. When one spouse dies, both halves of any qualifying community property normally receive a step-up in basis, which can significantly reduce capital gains tax when the surviving spouse later sells the asset.

The rules governing tax basis adjustments for inheritances can be complex, particularly when certain types of property are involved or Washington community property laws apply.

If you have questions about the step-up in basis or other estate tax minimization strategies, our office is here to help you develop a plan tailored specifically to your estate goals.