Step-Up in Basis in Florida

The step-up in basis is one of the most significant tax advantages available to beneficiaries who inherit assets. When someone dies, the tax basis of their assets is generally adjusted, or "stepped up," to the fair market value at the date of death. This means that any appreciation in value that occurred during the decedent's lifetime is effectively erased for income tax purposes. If the beneficiary later sells the inherited asset, they only pay capital gains tax on any increase in value that occurs after the date of death, not on the entire lifetime gain.

At the Law Offices of Albert Goodwin, PA, we help clients in Miami-Dade County and throughout Florida structure their estate plans to maximize the step-up in basis and minimize the tax burden on their beneficiaries.

How the Step-Up in Basis Works

Under Internal Revenue Code Section 1014, assets acquired from a decedent receive a basis equal to the fair market value of the asset at the date of the decedent's death (or, if the personal representative elects, the alternate valuation date six months after death). This adjustment applies regardless of what the decedent originally paid for the asset.

Example: A parent purchased a home in Miami-Dade County in 1990 for $150,000. At the time of the parent's death, the home is worth $800,000. If the parent had sold the home during their lifetime, they would have faced capital gains tax on up to $650,000 in gain (subject to any applicable exclusions). However, when the child inherits the home, the child's basis in the property is stepped up to $800,000. If the child sells the home shortly after inheriting it for $800,000, there is no capital gains tax. If the child holds the property and sells it later for $850,000, the child pays capital gains tax only on the $50,000 gain that accrued after the date of death.

What Assets Qualify for a Step-Up

The step-up in basis applies to most capital assets included in the decedent's gross estate for federal estate tax purposes. Qualifying assets include:

• Real estate: Residential homes, investment properties, vacant land, and commercial properties. Given the significant appreciation of real estate in South Florida over recent decades, the step-up in basis can save beneficiaries hundreds of thousands of dollars in capital gains taxes on inherited properties.
• Stocks and securities: Individual stocks, bonds, mutual funds, and exchange-traded funds held in taxable brokerage accounts.
• Business interests: Ownership interests in closely held businesses, partnerships, and LLCs.
• Personal property: Artwork, collectibles, jewelry, and other items that have appreciated in value.
• Cryptocurrency: Digital currencies such as Bitcoin and Ethereum that have appreciated since the decedent acquired them.

Assets That Do Not Receive a Step-Up

Certain assets do not qualify for a step-up in basis:

• Retirement accounts: Traditional IRAs, 401(k)s, and other tax-deferred retirement accounts do not receive a step-up in basis. Distributions from inherited retirement accounts are taxed as ordinary income to the beneficiary, just as they would have been to the original owner. This is a critical distinction that affects estate planning strategy.
• Assets in irrevocable trusts (in certain cases): Assets transferred to an irrevocable trust during the grantor's lifetime may not be included in the grantor's gross estate and therefore may not receive a step-up. However, certain types of irrevocable trusts (such as grantor trusts that are included in the estate) may still qualify.
• Income in respect of a decedent (IRD): Certain income items, such as unpaid salary, accrued interest, and deferred compensation, are classified as income in respect of a decedent and do not receive a step-up.
• Gifted assets: Assets given away during the owner's lifetime do not receive a step-up at the donor's death. Instead, the recipient takes the donor's original basis (carryover basis). This is a key reason why it is often better from a tax perspective to hold appreciated assets until death rather than gift them during lifetime.

The Tax Savings for Beneficiaries

The financial impact of the step-up in basis can be substantial. Consider these scenarios common in Florida:

Inherited Real Estate

A parent purchased a waterfront condominium in Miami Beach in 2000 for $200,000. By the time of the parent's death, the condominium is worth $1,200,000. Without the step-up in basis, selling the property would trigger capital gains tax on $1,000,000 in gain. At the current long-term capital gains rate of 20% (for higher-income taxpayers) plus the 3.8% net investment income tax, the tax could be approximately $238,000. With the step-up in basis, the beneficiary inherits at the $1,200,000 value and owes zero capital gains tax if they sell at that price.

Inherited Stock Portfolio

A decedent built a stock portfolio over 30 years with an original cost basis of $200,000 that grew to $1,500,000. If the decedent had sold the portfolio before death, they would owe capital gains tax on $1,300,000 in gain. When the beneficiary inherits the portfolio with a stepped-up basis of $1,500,000, all $1,300,000 of unrealized gain is eliminated for income tax purposes.

Family Business

A decedent founded a business valued at $3,000,000 at death with a nominal original basis. The step-up in basis adjusts the beneficiary's basis to $3,000,000, eliminating the built-in capital gain. If the beneficiary later sells the business for $3,500,000, they pay capital gains tax only on the $500,000 gain that occurred after the date of death.

Planning Strategies to Maximize the Step-Up

Hold Appreciated Assets Until Death

One of the most straightforward strategies is to hold highly appreciated assets until death rather than selling them or giving them away during lifetime. Selling triggers immediate capital gains tax, and gifting results in carryover basis (the recipient inherits the donor's original low basis). Holding the asset until death allows the full step-up to apply, permanently eliminating the lifetime appreciation from the income tax system.

This strategy is particularly relevant for Florida residents who own appreciated real estate. The significant appreciation of property values in Miami-Dade County and throughout South Florida means that the step-up in basis can save beneficiaries enormous sums. A home purchased decades ago for a modest price may be worth millions today, and the step-up eliminates the entire gain.

Avoid Gifting Highly Appreciated Assets

While there are valid reasons to make lifetime gifts (such as reducing the size of the taxable estate or transferring future appreciation), gifting highly appreciated assets is generally tax-inefficient because the recipient takes the donor's low carryover basis. If the goal is to transfer wealth to the next generation, it is often better to gift assets with low appreciation and retain highly appreciated assets so they receive the step-up at death.

If you want to make lifetime gifts, consider gifting:

• Cash
• Assets that have not appreciated significantly
• Assets that have declined in value (though selling at a loss and gifting the proceeds may be even better)

Revocable Living Trusts and the Step-Up

Assets held in a revocable living trust receive the same step-up in basis as assets owned individually. Because a revocable living trust is a grantor trust for income tax purposes, the trust assets are included in the grantor's gross estate at death and qualify for the full step-up. Using a revocable living trust does not sacrifice the step-up in basis, which makes it an ideal vehicle for avoiding probate without losing this valuable tax benefit.

Community Property Trust Considerations

Florida is not a community property state. In Florida, married couples typically own property as tenants by the entirety or as joint tenants with right of survivorship. Under these forms of ownership, when one spouse dies, only the deceased spouse's one-half interest in the property receives a step-up in basis. The surviving spouse's half retains its original basis.

Example: A married couple purchased an investment property together for $400,000 (each spouse's basis is $200,000). When one spouse dies and the property is worth $1,000,000, the deceased spouse's half receives a step-up to $500,000. The surviving spouse's half retains its original $200,000 basis. The surviving spouse's total basis in the property is now $700,000 ($500,000 stepped-up half + $200,000 original half). If the surviving spouse sells for $1,000,000, they pay capital gains tax on $300,000.

In community property states, both halves of community property receive a step-up when one spouse dies, which would have given the surviving spouse a full $1,000,000 basis and zero capital gains tax on an immediate sale.

To capture this benefit, some Florida couples consider establishing a community property trust under the laws of a state that permits them (such as Alaska, South Dakota, or Tennessee, which allow non-residents to establish community property trusts). By contributing appreciated assets to a properly established community property trust, a Florida couple may be able to achieve a full double step-up in basis on both spouses' interests when one spouse dies. This strategy is complex and requires careful legal analysis to ensure it is properly structured and respected by the IRS, but the potential tax savings can be significant for couples with substantial appreciated assets.

Intentionally Defective Grantor Trusts (IDGTs)

Advanced estate planning sometimes involves intentionally defective grantor trusts, which are irrevocable trusts that are treated as owned by the grantor for income tax purposes but are excluded from the grantor's estate for estate tax purposes. While IDGTs are powerful tools for transferring wealth, assets in an IDGT that are not included in the grantor's gross estate do not receive a step-up in basis at the grantor's death. For estates well below the federal estate tax exemption, the loss of the step-up may outweigh the estate tax savings. This trade-off must be carefully analyzed with an attorney and tax advisor.

The Alternate Valuation Date

The personal representative of the estate may elect to use an alternate valuation date, which is six months after the date of death, under IRC § 2032. This election is typically used when the estate's assets have declined in value after the date of death, which reduces the estate's value for estate tax purposes. However, the alternate valuation date also affects the step-up in basis: if the election is made, beneficiaries receive a basis equal to the value on the alternate date rather than the date of death. This election is only available for estates that are required to file a federal estate tax return and only makes sense when it results in a lower overall tax burden when considering both estate tax and income tax.

Step-Up in Basis and Florida's Tax Environment

Florida's lack of a state income tax makes the step-up in basis even more valuable for Florida residents and their beneficiaries. In states that impose a state capital gains tax, beneficiaries may still face state-level taxes even after receiving the federal step-up. In Florida, the stepped-up basis combined with the absence of a state income tax means that inherited appreciated assets can often be sold with zero state tax and minimal or no federal tax if sold near the date of death value.

This advantage is one reason Florida is attractive for retirees and high-net-worth individuals. By establishing Florida residency and holding appreciated assets here, they can position their estates to pass wealth to beneficiaries with maximum tax efficiency.

Contact the Law Offices of Albert Goodwin

If you want to structure your estate plan to maximize the step-up in basis and minimize the tax burden on your beneficiaries, the Law Offices of Albert Goodwin, PA can help. We advise clients on all aspects of tax-efficient estate planning, including asset holding strategies, trust structures, community property trust considerations, and coordination with probate and trust administration.

Call us at 786-522-1411 or email [email protected] to schedule a consultation. Our office is located at 121 Alhambra Plz #1000, Coral Gables, FL 33134.