Think about spending your life constructing wealth, investing in actual property, shares, or your corporation, with the hope of leaving a legacy on your kids. Then sooner or later, you end up questioning: Will the federal government take a large chunk of it anyway?
In case your property is properly above the federal property tax exemption threshold — $30 million for a married couple in 2026 beneath the OBBBA — you may be asking a really reliable query:
“What’s the purpose of the step-up in foundation if my property nonetheless owes thousands and thousands in property taxes?”
Conversely, in case your property is properly under the federal property tax exemption threshold, you may additionally ask the way more frequent query:
“What’s the good thing about the step-up in foundation if I will not be paying the loss of life tax anyway?”
As a result of I am not useless but, I have never been targeted an excessive amount of on the property tax owed upon loss of life. Nevertheless, like every good pre-mortem planner who thinks in two timelines, it is vital to make clear the confusion and plan accordingly.
Let’s stroll via the way it all really 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 essential 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 understanding there are two fully totally different taxes in play when somebody dies:
1. Property Tax – a tax on the whole worth of your belongings at loss of life, in case your property exceeds the federal exemption. This tax is paid by the property.
2. Capital Positive aspects Tax – a tax on the appreciation of belongings, however provided that these belongings are offered. This tax is paid by your heirs.
When somebody dies, their heirs get a step-up in value foundation on inherited belongings. Meaning the asset’s value foundation is reset to the truthful market worth (FMV) on the date of loss of life. The capital good points from the decedent’s lifetime are primarily worn out.
Should you’re in search of a monetary motive to carry onto your shares, actual property, and different belongings indefinitely, the step-up in value foundation is a compelling one. As a substitute of promoting your belongings, do what billionaires do, and borrow against them to incur no capital good points tax legal responsibility.
I used to suppose it was wasteful for traders to by no means promote and luxuriate in a greater life with the proceeds alongside the way in which. However it seems, by no means promoting may be the best present you possibly can go away your grownup kids.
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 many years in the past for $1 million, and it’s now your main residence. You each move away, and your two kids inherit the property.
Capital Positive aspects Tax:
Usually, in case your kids offered that home with a $49 million acquire, they’d owe capital good points 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 loss of life, they owe zero capital good points 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!
Effectively, not fairly.
Property Tax:
Regardless of being useless, you’re not off the hook completely. 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 charge, 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 kids) both:
- Must 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’ve gotten a big, illiquid property, you have to plan forward to determine how one can 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 situation, however there was no step-up in foundation. The children inherit your $50M home with a $1M value foundation. Now the whole taxes owed are:
• Property tax: $8.8 million
• Capital good points 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 only the $8.8 million property tax from $20.5 million.
In different phrases, the step-up in value foundation prevents double taxation. It doesn’t make property tax go away. However it shields your heirs from additionally having to pay capital good points 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 usually tied up in tech shares you acquire within the early 2000s. Perhaps you bought into Amazon at $50 a share or invested early in a basket of personal AI corporations. Now, your portfolio is price $45 million, however your value foundation is just $2 million.
While you move 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 good points 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 brink
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 loss of life is $25 million, your taxable property can be $20 million. At a 40% property tax charge, the property would owe roughly $8 million. This tax have to be paid earlier than distributions to your heirs, that means they might obtain roughly $37 million, not the complete $45 million.
The excellent news is that the step-up in value foundation applies to the complete $45 million, not simply the $37 million your heirs really obtain after taxes. So in the event that they promote the belongings for $45 million, they’ll owe zero capital good points tax as a result of their value foundation has been reset to the truthful market worth on the time of loss of life.
With out the step-up, they might inherit your unique value foundation of $2 million. In the event that they offered the portfolio for $45 million, they’d owe capital good points tax on $43 million in unrealized good points. On the 23.8% federal long-term capital good points charge, that’s over $10 million in potential tax — on prime of the $8 million in property tax.
Step-Up in Foundation Instance 3: A $4 Million Rental Property
Let’s say you acquire a rental property 30 years in the past for $400,000. Over time, its worth has appreciated to $4 million, and it’s now absolutely 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.
Because the federal property tax exemption for a person is $13.99 million in 2025 (or $27.98 million for a married couple), your property is properly under the taxable threshold. Meaning no property tax is due—your heirs get every little thing with out the property owing a penny to the IRS.
However right here’s the place the step-up in foundation makes a large distinction:
Capital Positive aspects Tax With out the Step-Up:
Should you gifted the property to your little one whereas alive, they’d inherit your unique $400,000 foundation, not the $4 million truthful market worth. In the event that they later offered it for $4 million, they’d owe capital good points tax on $3.6 million of good points. That is possible over $850,000 in taxes, relying on their earnings and state.
Alternatively, when you maintain the property till your loss of life, then your heirs get a step-up in foundation to the truthful market worth in your date of loss of life — on this case, $4 million. In the event that they promote instantly, no capital good points tax is due.
So paradoxically, doing nothing and holding onto the property till loss of life is commonly probably the most tax-efficient technique. So maybe your boomer dad and mom aren’t so grasping in spite of everything for not serving to you extra whereas alive.
Capital Positive aspects Tax With the Step-Up:
However when you maintain the property till loss of life, 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 good points tax.
Who Pays What Tax?
- Property tax is paid by the property, if owed, earlier than belongings are distributed.
- Capital good points tax is just paid by the heirs in the event that they promote the asset and provided that there’s a acquire 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 good points 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 kids obtain.
For high-net-worth families, the step-up is important to stop what may in any other case turn out to be a 60%+ mixed tax burden.
Even when you don’t anticipate your property to be giant sufficient to set off property tax, the step-up in foundation can nonetheless save your heirs lots of of 1000’s to thousands and thousands of {dollars} in capital good points taxes.
The step-up is likely one of the most powerful estate planning tools out there — and a compelling motive to carry onto appreciated belongings till loss of life, particularly in case your aim is to maximise what you move on.
Actions You Can Take To Scale back Your Property Tax
In case your property is properly 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 — it’s worthwhile to 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 longer term 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 Dwelling Belief Would not Scale back Your Taxes
For these questioning whether or not placing your belongings in a revocable living trust may help you save on property taxes or capital good points taxes — it doesn’t. A revocable residing belief is primarily a instrument for avoiding probate, sustaining privateness, and streamlining the distribution of your belongings after loss of life.
Whereas it does guarantee your heirs obtain the step-up in foundation on appreciated belongings (because the belief remains to be thought of a part of your property), it doesn’t cut back your property’s worth for property tax functions. The IRS treats belongings in a revocable belief as when you nonetheless personal them outright.
In different phrases, the belief helps with logistics and effectivity — not with lowering your tax invoice. In case your aim is to decrease your property taxes, you may must discover different methods, equivalent to lifetime gifting, irrevocable trusts, or charitable giving, which really take away belongings out of your taxable property.
2. Annual Gifting
You and your partner may give as much as $19,000 (2025) per particular person, per yr to anybody with out lowering your lifetime exemption. The annual present restrict tends to go up yearly to account for inflation.
Instance: you and your partner have 2 kids and 4 grandchildren. That’s 6 individuals × $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 properly under the property tax exemption quantity, annual gifting will not make a distinction for property tax discount functions. You have simply determined to assist your kids or others now, moderately than after you are useless.
Additional, you are free to present greater than the present tax restrict a yr if you want. Technically, you are alleged to file Form 709 when you do. Nevertheless, I do not suppose it issues when you’re approach under the property tax threshold.
3. Charitable Giving
Donating a part of your property to a charity can cut back your taxable property and assist causes you care about. Charitable the rest trusts can present earnings for you and a profit on your heirs, whereas lowering the tax burden.
Instance: You arrange a Donor Advised Fund and donate $100,000 a yr to your kids’s personal faculty for 10 years. Not solely do you assist your faculty, you cut back your taxable property by $1,000,000 and get a board seat. In flip, your kids get a leg up in moving into the perfect highschool and schools.
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 loss of life profit can be utilized by your heirs to pay property taxes, so that they don’t should promote belongings.
Professional: Supplies tax-free liquidity.
Con: You should surrender 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 at this time (~$1.5–2M)
- Keep away from capital good points on sale of inventory contained in the belief
- Reduces taxable property by $5M
Professional: Provides you earnings, avoids capital good points, helps charity
Con: Your heirs don’t obtain the donated asset
6. Household Restricted Partnership (FLP)
Put belongings into an FLP and present minority pursuits to relations. As a result of these pursuits lack management and marketability, the IRS permits you to 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 lowering taxable property
Con: IRS scrutinizes reductions — have to be executed fastidiously
7. Relocate To A Decrease Tax State Or Nation
Lastly, it’s possible you’ll need to take into account relocating to a state with no state estate or inheritance tax earlier than you die. There are over 30 such states. Should you can efficiently set up residency, your property—and finally your heirs—may save thousands and thousands of {dollars} in taxes.
Now, when you’re a multi-millionaire thinking about moving to another country to keep away from property taxes, take into account: there’s no escaping the federal property tax in case your property exceeds the exemption threshold. Even when 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 loss of life.
Nevertheless, when you formally surrender your U.S. citizenship, the principles change. You’ll 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 when you can’t certify 5 years of U.S. tax compliance, you’ll be categorised as a “lined expatriate” and could also be topic to an exit tax beneath IRC Part 877A.
This exit tax treats all of your worldwide belongings as in the event that they had been offered the day earlier than you surrender, taxing any unrealized good points above a sure exemption.
Closing Ideas: The Step-Up in Foundation Helps A Lot
In case your property is beneath the federal exemption, the step-up in foundation stays a strong instrument that lets your heirs inherit appreciated belongings tax-free. By holding onto your wealth till loss of life, your heirs obtain a stepped-up value foundation and might keep away from capital good points taxes in the event that they promote. In distinction, when you present appreciated belongings throughout your lifetime, the recipient inherits your unique value foundation, doubtlessly triggering vital capital good points taxes upon sale.
As soon as your property exceeds the exemption threshold, the federal property tax kicks in. With out correct planning, your heirs might even be compelled to promote beneficial belongings simply to cowl the tax invoice. The step-up helps, nevertheless it’s not an alternative choice to a considerate property plan. Methods like GRATs, ILITs, and charitable trusts can dramatically cut back and even remove your property tax legal responsibility, however provided that you begin planning early.
Additionally take into account: not all belongings get a step-up in foundation. Pre-tax retirement accounts like IRAs and 401(ok)s don’t qualify. As a substitute, your heirs will owe ordinary income tax once they withdraw the cash—not capital good points.
Your greatest transfer? Speak to an skilled estate planning attorney. We have now, and it made a world of distinction for our peace of thoughts. The step-up might save your heirs from one tax, however the IRS remains to be ready with one other.
Readers, are you now much less upset about your rich dad and mom holding onto their belongings as a substitute of gifting them to you whereas they’re nonetheless alive—because of the step-up in value foundation?
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