Think about spending your life constructing wealth, investing in actual property, shares, or your online business, with the hope of leaving a legacy to your youngsters. Then in the future, 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 is perhaps asking a really authentic 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 extra frequent query:
“What’s the advantage of the step-up in foundation if I will not be paying the loss of life tax anyway?”
As a result of I am not lifeless 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 essential to make clear the confusion and plan accordingly.
Let’s stroll by means of the way it all really works. I’ll clarify it with three examples, so that you’ll stroll away understanding why the step-up in foundation nonetheless issues and why property tax planning turns into vital 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 utterly completely 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 Features 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. Which means the asset’s value foundation is reset to the honest 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 on the lookout for a monetary purpose 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.
I used to assume it was wasteful for buyers to by no means promote and revel in a greater life alongside the way in which. However it seems, by no means promoting is perhaps the best present you would depart 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 value $50 million. You purchased it a long time in the past for $1 million, and it’s now your major residence. You each move away, and your two youngsters inherit the property.
Capital Features Tax:
Usually, in case your youngsters offered that home with a $49 million acquire, they’d owe capital good points tax — round 20% federal plus 3.8% internet funding revenue 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 nice fortune of being born to a rich bank of mom and dad!
Nicely, not fairly.
Property Tax:
However you’re not off the hook completely. As a result of your property is value $50 million (you haven’t 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 youngsters) both:
- Need to promote half or all the home to pay the property tax, or
- Use different liquid belongings within the property (if any) or borrow towards the home
- Borrow Towards 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 recognize you’ve got a big, illiquid property, you need to plan forward to determine how you 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 state of affairs, however there was no step-up in foundation. The children inherit your $50M home with a $1M value foundation. Now the overall 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
Whole 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 value foundation prevents double taxation. It doesn’t make property tax go away — nevertheless 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 $40 Million Inventory Portfolio
Let’s say your internet value is in tech shares you purchased within the early 2000s. Perhaps you bought into Amazon at $50 a share or invested in a portfolio of personal AI corporations. Your portfolio’s now value $40 million, and your value foundation is simply $2 million.
If you move away:
- Your heirs obtain the inventory at a stepped-up foundation of $40 million
- In the event that they promote immediately, they owe no capital good points tax
- But when your whole property (together with different belongings) exceeds the exemption, they’ll nonetheless face estate tax on the quantity over the brink
Let’s say your property is $45 million, and also you’re married. With a $25 million exemption on the time of loss of life, the taxable property is $20 million, equaling an property tax of $8 million.
Once more, the step-up doesn’t prevent from the property tax, nevertheless it saves your heirs from owing capital good points tax on $38 million in good points, which might have been one other $9 million or so.
Step-Up in Foundation Instance 3: A $4 Million Rental Property
Let’s say you purchased 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 value $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. 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 a large distinction:
Capital Features Tax With out the Step-Up:
Should you gifted the property to your little one whereas alive, they’d inherit your authentic $400,000 foundation, not the $4 million honest 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 — possible over $850,000 in taxes, relying on their revenue and state.
However, in the event you maintain the property till your loss of life, then your heirs get a step-up in foundation to the honest market worth in your date of loss of life — on this case, $4 million. In the event that they promote immediately, no capital good points tax is due.
So mockingly, doing nothing and holding onto the property till loss of life is usually essentially 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 Features Tax With the Step-Up:
However in the event you maintain the property till loss of life, the premise is stepped as much as the $4 million honest 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 simply 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 Reward — However It’s Not a Defend
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 youngsters obtain.
For high-net-worth families, the step-up is important to forestall what may in any other case grow to be a 60%+ mixed tax burden.
Even in the event 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 a whole bunch of 1000’s to thousands and thousands of {dollars} in capital good points 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 loss of life, particularly in case your objective 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 is advisable to plan forward. Some methods embrace:
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 development goes to heirs estate-tax free
A Revocable Dwelling Belief Does not Scale back Your Taxes
For these questioning whether or not placing your belongings in a revocable living trust will help you save on property taxes or capital good points taxes — it doesn’t. A revocable residing belief is primarily a software 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-about 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 in the event you nonetheless personal them outright.
In different phrases, the belief helps with logistics and effectivity — not with decreasing your tax invoice. In case your objective is to decrease your property taxes, you may must discover different methods, resembling lifetime gifting, irrevocable trusts, or charitable giving, which really 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 present restrict tends to go up yearly to account for inflation.
Instance: you and your partner have 2 youngsters 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 youngsters or others now, quite than after you are lifeless.
Additional, you are free to provide greater than the present tax restrict a yr if you want. Technically, you are purported to file Kind 709 in the event you do, however I do not assume it issues in the event 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 help causes you care about. Charitable the rest trusts can present revenue 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 college for 10 years. Not solely do you assist your college, you cut 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 very best 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 while 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: Offers tax-free liquidity.
Con: You have to quit management of the coverage (however can fund premiums by way of gifting).
5. Charitable The rest Belief (CRT)
Place appreciated belongings right into a CRT. You obtain revenue for all times, and while you die, the rest goes to charity. You get a partial property tax deduction now.
Instance:
- Donate $5M appreciated inventory
- You obtain $200K/yr revenue
- Get a charitable deduction immediately (~$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 revenue, 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 members of the family. As a result of these pursuits lack management and marketability, the IRS lets you low cost their worth by 20–35%.
Instance:
- Transfer $20M into an FLP
- Reward 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 performed rigorously
7. Relocate To A Decrease Tax State Or Nation
Lastly, it’s possible you’ll need to contemplate 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 in the end your heirs—may save thousands and thousands of {dollars} in taxes.
Now, in the event you’re a multi-millionaire thinking about moving to another country to keep away from property taxes, remember: there’s no escaping the federal property tax in case your property exceeds the exemption threshold. Even in the event you’ve lived overseas for many years, so long as you’re a U.S. citizen, your total worldwide property stays topic to U.S. federal property tax upon your loss of life.
Nevertheless, in the event 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 value exceeds $2 million, or in the event you can’t certify 5 years of U.S. tax compliance, you’ll be categorised as a “coated 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 have been offered the day earlier than you resign, 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 robust software 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, in the event you present appreciated belongings throughout your lifetime, the recipient inherits your authentic value foundation, probably triggering important 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 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 cut back and even get rid of your property tax legal responsibility, however provided that you begin planning early.
Additionally remember: not all belongings get a step-up in foundation. Pre-tax retirement accounts like IRAs and 401(okay)s don’t qualify. As a substitute, your heirs will owe ordinary income tax after they withdraw the cash—not capital good points.
Your finest transfer? Speak to an skilled estate planning attorney. We’ve, 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 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 an alternative of gifting them to you whereas they’re nonetheless alive—due to the step-up in value foundation? Does it make extra sense for extra of us to maintain onto appreciated belongings till loss of life and borrow towards them if wanted, quite than promote and set off capital good points taxes?
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