At Clarity Legal Group®, we know that for many of our clients, taxes are a big concern. And it makes sense—tax consequences, including how the stepped-up basis works, play a major role in shaping a smart estate plan. The good news is, there are tools and strategies available that can help reduce—or even eliminate—costly tax burdens for you, your estate, and your loved ones.
One important aspect of estate planning is being intentional about when and how others inherit from you. For instance, we often work with parents who want to protect children—young or simply not yet financially mature—by setting up trusts to manage their inheritance. Others are thinking ahead and wondering whether gifting assets during their lifetime might simplify things.
But as with many things in life, what seems simple on the surface can come with hidden complications. If you give away an asset that’s subject to capital gains tax, you may unintentionally increase your family’s tax burden. One of the key tax concepts to understand in this context is something called the stepped-up basis. Here’s what it is—and why it matters.
What Is “Basis”?
In simple terms, basis is the amount you’ve invested in a piece of property. For example, if you bought a vacation home for $350,000, that’s your basis. For real estate, your basis might also include things like renovations or additions.
Even if the value of the property increases, your basis stays the same. When you sell, capital gains tax is calculated on the difference between the sale price and the basis.
Example:
If you purchased that vacation home for $350,000 and later sold it for $750,000, your capital gain is $400,000—and that’s the amount subject to capital gains tax.
Now, here’s where it gets important: if you give that home to your children during your lifetime, they inherit your basis. This is called carryover basis. If they turn around and sell it for $750,000, they’ll owe capital gains tax on the full $400,000 gain.
But if they inherit that same home after your death? That’s where a stepped-up basis can be a game-changer.
What Is a “Stepped-Up” Basis?
A stepped-up basis resets the value of the asset to its fair market value on the date of your death—but only if it’s included in your taxable estate. That adjustment can wipe out a significant capital gains tax liability.
Let’s go back to our vacation home example. If your children inherit the property when its fair market value is $750,000, that becomes their new basis. If they sell it for $750,000, they owe no capital gains tax because there’s no gain.
That’s a potential tax savings of tens of thousands of dollars—simply by waiting to transfer the asset at death instead of during your lifetime.
What About the Primary Residence Exemption?
You might be thinking: “Wait, don’t I get an exemption when I sell my home?” You do—up to $250,000 for individuals and $500,000 for married couples, if it’s your primary residence. But here’s the catch: that exemption doesn’t transfer to your children. If you gift them the home while you’re alive, they don’t get the exemption and they don’t get a stepped-up basis either. It’s just one more reason not to give away your home during your lifetime.
Stepped-Up Basis and Jointly Owned Property
Things get more complicated when property is jointly owned—especially between spouses. In most states (including North Carolina), only half of the property’s value is included in the estate of the first spouse to die. That means only half of the property gets a step-up in basis.
Example:
Let’s say you and your spouse bought a vacation home for $350,000, and it’s worth $750,000 when one spouse passes away. Only their half of the property gets the step-up. So, one half of the basis jumps from $175,000 to $375,000. The surviving spouse’s half stays at $175,000. The new total basis is $550,000. If the property is sold for $750,000, there’s still a $200,000 taxable gain.
That remaining gain highlights why gifting appreciated property—even between spouses—requires careful planning.
The Role of Estate Planning
Understanding how basis works—and the benefits of a stepped-up basis—is just one part of crafting a thoughtful estate plan. At Clarity Legal Group®, we help our clients navigate these complex rules to make the best decisions for their families, both now and in the future.
With the right strategy, it’s possible to minimize or eliminate capital gains taxes and preserve more of your legacy for your loved ones.
Talk to a Durham Estate Planning Attorney
If you have questions about stepped-up basis, gifting assets, or reducing taxes through estate planning, we’re here to help. Call Clarity Legal Group® at 919-484-0012 or contact us online to schedule a conversation. We’d be honored to work with you.
This blog post was previously published and was updated May 2025
