Think about spending your life constructing wealth, investing in actual property, shares, or what you are promoting, with the hope of leaving a legacy to your youngsters. Then sooner or later, you end up questioning: Will the federal government take an enormous chunk of it anyway?
In case your property is nicely above the federal property tax exemption threshold — $30 million for a married couple in 2026 underneath the OBBBA — you may be asking a really authentic query:
“What’s the purpose of the step-up in foundation if my property nonetheless owes hundreds of thousands in property taxes?”
Conversely, in case your property is nicely under the federal property tax exemption threshold, you may also ask the much more frequent 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 lifeless but, I have not been centered an excessive amount of on the property tax owed upon dying. Nevertheless, like every good pre-mortem planner who thinks in two timelines, it is essential to make clear the confusion and plan accordingly.
Let’s stroll by means of the way it all truly works. I’ll clarify it with three examples, so that you’ll come away understanding why the step-up in foundation nonetheless issues and why property tax planning turns into crucial 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 realizing there are two fully completely different taxes in play when somebody dies:
1. Property Tax – a tax on the whole worth of your belongings at dying, in case your property exceeds the federal exemption. This tax is paid by the property.
2. Capital Positive factors 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 truthful market worth (FMV) on the date of dying. The capital features from the decedent’s lifetime are primarily worn out.
In the event you’re in search of a monetary purpose to carry onto your shares, actual property, and different belongings indefinitely, the step-up in price foundation is a compelling one. As an alternative of promoting your belongings, do what billionaires do, and borrow against them to incur no capital features tax legal responsibility.
I used to suppose it was wasteful for buyers to by no means promote and luxuriate in a greater life with the proceeds alongside the best way. But it surely seems, by no means promoting may be the best reward you can go away your grownup youngsters.
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 need to use an excessive instance. Thinking in extremes helps you perceive something higher.
Let’s say you and your partner personal a single home price $50 million. You obtain it a long time in the past for $1 million, and it’s now your main residence. You each cross away, and your two youngsters inherit the property.
Capital Positive factors Tax:
Usually, in case your youngsters bought that home with a $49 million achieve, they’d owe capital features tax — round 20% federal plus 3.8% internet funding earnings tax. That’s over $11 million in taxes.
However due to the step-up in foundation, the associated fee 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 rich bank of mom and dad!
Nicely, not fairly.
Property Tax:
Regardless of being lifeless, you’re not off the hook solely. 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 price, that’s a $8.8 million property tax invoice. Ouch.
And right here’s the important thing level: the property tax comes first. It needs to be paid earlier than the heirs get the property — and it’s paid out of the property itself.
So the executor (maybe your youngsters) both:
- Should 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 realize you may have a big, illiquid property, you will need to plan forward to determine the way 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 youngsters inherit your $50M home with a $1M price foundation. Now the overall 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 whole 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. But it surely 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 $45 Million Inventory Portfolio
Let’s say your internet price is generally tied up in tech shares you obtain within the early 2000s. Possibly you bought into Amazon at $50 a share or invested early in a basket of personal AI firms. Now, your portfolio is price $45 million, however your price foundation is just $2 million.
Whenever you cross away:
- Your heirs obtain the inventory with a stepped-up foundation of $45 million
- In the event that they promote instantly, they owe no capital features tax
- Nevertheless, in case your whole property (together with different belongings) exceeds the federal exemption, they’ll nonetheless face property tax on the quantity over the edge
Let’s say your whole property is price $45 million and also you’re married. Assuming you’ve correctly elected portability and the mixed federal property tax exemption on the time of dying is $25 million, your taxable property could be $20 million. At a 40% property tax price, the property would owe roughly $8 million. This tax should be paid earlier than distributions to your heirs, which means they’d obtain roughly $37 million, not the complete $45 million.
The excellent news is that the step-up in price foundation applies to the complete $45 million, not simply the $37 million your heirs truly obtain after taxes. So in the event that they promote the belongings for $45 million, they’ll owe zero capital features tax as a result of their price foundation has been reset to the truthful market worth on the time of dying.
With out the step-up, they’d inherit your unique price foundation of $2 million. In the event that they bought the portfolio for $45 million, they’d owe capital features tax on $43 million in unrealized features. On the 23.8% federal long-term capital features price, that’s over $10 million in potential tax — on high of the $8 million in property tax.
Step-Up in Foundation Instance 3: A $4 Million Rental Property
Let’s say you obtain 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 haven’t any mortgage, and your whole property—together with this property, some retirement financial savings, and different belongings—is price $5 million.
For the reason that federal property tax exemption for a person is $13.99 million in 2025 (or $27.98 million for a married couple), your property is nicely under the taxable threshold. Which means no property tax is due—your heirs get every thing 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 Positive factors Tax With out the Step-Up:
In the event you gifted the property to your baby whereas alive, they’d inherit your unique $400,000 foundation, not the $4 million truthful 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. That is seemingly over $850,000 in taxes, relying on their earnings and state.
Then again, should you maintain the property till your dying, then your heirs get a step-up in foundation to the truthful market worth in your date of dying — on this case, $4 million. In the event that they promote immediately, 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 mother and father aren’t so grasping in any case for not serving to you extra whereas alive.
Capital Positive factors Tax With the Step-Up:
However should you maintain the property till dying, the premise is stepped as much as the $4 million truthful 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 just paid by the heirs in the event that they promote the asset and provided that there’s a achieve 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 rich enough to pay much more taxes!
The Step-Up Is A Present — However It’s Not a Protect
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 youngsters obtain.
For high-net-worth families, the step-up is important to forestall what might in any other case turn out to be a 60%+ mixed tax burden.
Even should you don’t count on your property to be massive sufficient to set off property tax, the step-up in foundation can nonetheless save your heirs lots of of hundreds to hundreds of thousands of {dollars} in capital features taxes.
The step-up is without doubt one of the most powerful estate planning tools accessible — and a compelling purpose 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 nicely 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 — you should plan forward to pay the property taxes. Some methods embody:
1. Grantor Retained Annuity Belief (GRAT)
Transfer appreciating belongings out of your property into trusts, like a Grantor Retained Annuity Trust (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 long run 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 Residing Belief Does not Cut back Your Taxes
For these questioning whether or not placing your belongings in a revocable living trust may also help you save on property taxes or capital features taxes — it doesn’t. A revocable dwelling belief is primarily a software 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 should you nonetheless personal them outright.
In different phrases, the belief helps with logistics and effectivity — not with decreasing your tax invoice. In case your purpose is to decrease your property taxes, you may must discover different methods, equivalent to lifetime gifting, irrevocable trusts, or charitable giving, which truly take away belongings out of your taxable property.
2. Annual Gifting
You and your partner can provide as much as $19,000 (2025) per particular person, per yr to anybody with out decreasing your lifetime exemption. The annual reward restrict tends to go up yearly to account for inflation.
Instance: you and your partner have 2 youngsters and 4 grandchildren. That’s 6 folks × $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 nicely 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 youngsters or others now, somewhat than after you are lifeless.
Additional, you are free to offer greater than the reward tax restrict a yr if you want. Technically, you are imagined to file Form 709 should you do. Nevertheless, I do not suppose it issues should you’re manner 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 earnings for you and a profit to your heirs, whereas decreasing the tax burden.
Instance: You arrange a Donor Advised Fund and donate $100,000 a yr to your youngsters’s personal faculty for 10 years. Not solely do you assist your faculty, you scale back your taxable property by $1,000,000 and get a board seat. In flip, your youngsters get a leg up in stepping into the perfect highschool and faculties.
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 whenever you die.
That $3 million dying profit can be utilized by your heirs to pay property taxes, in order that they don’t must promote belongings.
Professional: Offers tax-free liquidity.
Con: You could hand over management of the coverage (however can fund premiums through gifting).
5. Charitable The rest Belief (CRT)
Place appreciated belongings right into a CRT. You obtain earnings for all times, and whenever you die, the rest goes to charity. You get a partial property tax deduction now.
Instance:
- Donate $5M appreciated inventory
- You obtain $200K/yr earnings
- Get a charitable deduction as we speak (~$1.5–2M)
- Keep away from capital features on sale of inventory contained in the belief
- Reduces taxable property by $5M
Professional: Provides you earnings, 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 reward minority pursuits to relations. As a result of these pursuits lack management and marketability, the IRS means that you can low cost their worth by 20–35%.
Instance:
- Transfer $20M into an FLP
- Present 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 decreasing taxable property
Con: IRS scrutinizes reductions — should be finished rigorously
7. Relocate To A Decrease Tax State Or Nation
Lastly, you could need to contemplate relocating to a state with no state estate or inheritance tax earlier than you die. There are over 30 such states. In the event you can efficiently set up residency, your property—and finally your heirs—might save hundreds of thousands of {dollars} in taxes.
Now, should you’re a multi-millionaire thinking about moving to another country to keep away from property taxes, take into accout: there’s no escaping the federal property tax in case your property exceeds the exemption threshold. Even should you’ve lived overseas for many years, so long as you’re a U.S. citizen, your whole worldwide property stays topic to U.S. federal property tax upon your dying.
Nevertheless, should you formally resign your U.S. citizenship, the foundations change. You’ll now 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 should you can’t certify 5 years of U.S. tax compliance, you’ll be labeled as a “lined 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.
Ultimate 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 strong software 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, should you reward appreciated belongings throughout your lifetime, the recipient inherits your unique 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 useful belongings simply to cowl the tax invoice. The step-up helps, nevertheless it’s not an alternative 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 take into accout: not all belongings get a step-up in foundation. Pre-tax retirement accounts like IRAs and 401(ok)s don’t qualify. As an alternative, your heirs will owe ordinary income tax after they withdraw the cash—not capital features.
Your greatest transfer? Discuss to an skilled estate planning attorney. Now we have, 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 mother and father 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?
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