March 5, 2024 • 25 mins
In the pursuit of legally reducing lifetime tax payments, this episode unveils the strategic advantages of understanding step-up in basis and how it applies to various inherited assets. Chris succinctly breaks down the essence of cost basis and its implications for capital gains tax. His expertise shines through as he presents everyday scenarios, articulating a clear picture of the benefits and intricacies involved.
Key Takeaways:
- A 'step-up in basis' significantly reduces capital gains tax on inherited assets by adjusting the asset's cost basis to its market value at the time of inheritance.
- Inherited assets are automatically treated as long-term capital gains, beneficial for lower tax rates, regardless of how long the asset was held prior to sale.
- Beneficiaries should not rely on old brokerage statements for cost basis and must ensure their inherited assets' cost basis is updated correctly.
- In community property states, surviving spouses may benefit from a "double step up in basis," further reducing potential tax liabilities.
- Consulting with a tax professional is crucial when dealing with inherited property to ensure proper tax treatment and maximization of available deductions.
Notable Quotes:
- "It's much better to inherit assets than to receive them as a gift."
- "Any inherited assets are automatically considered long-term capital gains, which we know are the lower rates."
- "Make sure that you, what we call, review your depreciation schedules or realistically have your tax professional review your depreciation schedules because you might not know what the heck you're looking at."
- "A lot of the things we talk about here on the podcast is really based around tax planning and strategy."
Resources:
- Defeating Taxes Facebook Group: Search "Defeating Taxes" on Facebook to find and join the private group discussed in the episode.
Dive into the full episode for an in-depth exploration of 'step up in basis' and gain valuable insights into how it can benefit your tax strategy. Stay tuned for more episodes from "Teaching Tax Flow" to continue enhancing your tax knowledge and uncover constructive financial tips.
Episode Sponsor: The Mortgage Shop
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
John Tripolsky (00:04):
Welcome to the Teaching Tax Flow podcast, where
the goal is to empower andeducate you to legally and
ethically minimize taxes paidover your lifetime.
Hey, everybody, and welcome backto Teaching Tax Flow, the
podcast today, episode 73. Weare gonna step up our game and
talk about the step up in basis,what that means if you even care
(00:28):
at all about taxes, and we knowyou do because you're here.
Before we get into the topic,though, let's take a brief
moment as always and thank oursponsor on this episode.
Ad Read (00:39):
This podcast is sponsored by The Mortgage Shop.
Are you looking to qualify foran investment credit loan
without jumping through hoops?That's easy. They have loans
with LTV up to 89.99%. Exploringtheir products and discovering
how they can work for you issimple. Just visit mortgage.shop
or call 865325256 6, and tellthem TTF sent you.
John Tripolsky (01:04):
Welcome. Welcome. Welcome back to the
Teaching Tax Flow podcast.Hopefully, you listened to the
intro. If not, we know you'reanxious.
You jump right into it. Today,step up in basis is on the
table. And Chris is back withus. Chris Picciurro, how are
you, man?
Chris Picciurro (01:20):
Oh, it's so good to be back, Johnny t. How
are you, my friend?
John Tripolsky (01:24):
Oh, it's Michigan. It's chilly, but it's
all good, man. It's all good.Let's warm up the plates and
talk about what in the world isstep up in basis. And, actually,
here's a little disclaimer on myend.
Right? Everybody knows I am notthe tax guy. You are the tax
guy. I am really not sure a 100%what this topic even is. So give
(01:45):
us your, well, call
Chris Picciurro (01:47):
it knowledge nugget, I guess, on what step up
in tax basis actually is. Thisis a confusing topic for many,
so even some tax professionals,and it's a topic that causes
people sometimes to pay too muchin tax. So we're gonna keep
things as as, elementary aspossible, because this is this
(02:11):
is a confusing topic, like Isaid. So here's the situation.
Let's start with basis, Okay.
First of all, before we talkabout step up in basis. Basis is
a term that we use in tax, andit's short for cost basis. So
really easy example, John. Let'ssay that you bought some, a
(02:34):
share of of Bitcoin
John Tripolsky (02:36):
Okay. Okay.
Chris Picciurro (02:38):
Or 1 Bitcoin for $30,000 and you go and sell
it for $60,000, okay, your costbasis for that Bitcoin is
$30,000. You sold it for$60,000. So to determine what
your capital gain is, so howmuch you pay tax on, you take
(02:59):
the 60,000 minus your cost basisof 30,000. Then, obviously, if
it's a long term gain long termgain or short term gain, it's
taxed differently. That's themost simplistic tax basis that
we can come up with.
Alright? So a step up in basisis a special rule in the tax
(03:20):
code that allows people toadjust their tax basis for any
asset that they inherited. Soyou're gonna hear a lot of times
people say, well, it's muchbetter to inherit assets than
than to receive them as a gift.Now I'm gonna talk about that,
you know, in our example. Soeveryone take a breath,
(03:41):
understand we're gonna gothrough a real life example.
Names have been hidden, but toreally explain the step up in
cost basis. So the bottom lineis when you inherit an asset,
now that asset could be thatthat that cryptocurrency, it
could be a home, it could be astock, It could be a piece of
(04:03):
artwork. Any asset. When youinherit that asset, your cost
basis, meaning what you've whatthe IRS is looking at or what
you've paid for that is whateverthe fair market value is at the
time someone passed away. And sothere's an adjustment.
(04:24):
So for someone inhering an assetfrom what we call a decedent,
usually, it's either could bethrough a a just a will, a
probate case, or a trust. Thetax basis of the asset gets
stepped up to fair market value.
John Tripolsky (04:41):
So I know on this, if anybody's a fan of
those true crime podcasts andyou talk about, you know, hey.
You're better to inherit thanbetter to, be gifted. We are not
implying you should go out andstart, you know, whacking your
in laws or anything. So this isnot a murder. No.
That
Chris Picciurro (04:59):
that that's not a it's
John Tripolsky (05:00):
not a a murder investor. Whatever. You get you
get where I'm going with this.Let's get back on topic. So,
yeah, walk us through this.
I'm super curious. I'm, like,super curious on how this works
because, right, this issomething that I'm gonna make
the assumption a lot of peopledon't even know exists. Right?
And and they just kind of assumethat things are gonna happen. So
this, I think, will lay levelthe playing field with a lot of
(05:23):
concerns, I should say.
Chris Picciurro (05:26):
Absolutely. Because a lot of tax software,
even if you're a self prepareror if you're someone that
prepares taxes professionally,even those, a lot of times,
those softwares don't trigger tofigure out what a you know, if
the asset's been stepped up. Sothere are 3 real big benefits of
a step up in basis, and there'sa reason. Remember, one of the
(05:47):
three laws of teaching tax flowis that tax laws are written to
encourage or discourage certainbehavior, so we want to inherit
assets. We also know that theIRS wants some type of
simplicity.
Now if you're snickering whenyou hear that, we understand,
but let me explain. So there's 3main benefits of a step up in
basis. The first one is areduced capital gain. Right? So,
(06:08):
John, let's let's say you hadthat that that share of Bitcoin,
you paid 6 $30,000, it's worth60,000, you you, get hit by a
beer truck.
You know you know how that's howI like to knock people out.
Right? And, your daughterinherits it. Okay? Some reason
Stacy doesn't inherit it.
Let just go with it. Yourdaughter inherits it. She sells
(06:33):
it the next day for $60,100.Okay? She gets her cost basis is
60,000 because that's what itwas worth when you got hit by
the beer truck.
She only pays tax on a $100,thus reduced capital gain. She
sells it for $60,100. Her eventhough you paid 30, her basis is
(06:55):
60. So a reduced capital gaincalculation is huge, and this is
something that people don't knowthat, about. Any inherited
assets are automaticallyconsidered long term capital
gains, which we know are thelower rates.
So you even if you inheritedasset, you don't have to keep it
(07:17):
for a year to get the long termcapital gain treatment. So one
is reduced capital gain. Number2 really plays a role when we're
talking about real estate or anytype of, like, business
equipment. The avoidance ofdepreciation recapture. Oh my
gosh.
What's depreciation recapture?Should we do another episode on
that? We probably should. Here'swhat depreciation recapture is.
(07:40):
If you have an asset let's use aeasy example.
Let's say you bought a rentalproperty for $275,000 and there
is no land allocation, soexactly $10,000 depreciation
every year. Let's say you ownthat property. You bought it for
2.75. You owned it for 10 years.You took a $100,000 of
(08:00):
depreciation deduction.
Right? So you've written thatdeducted that on your tax
return. When you sell theproperty, you have to recapture
or take that $100,000 ofdepreciation deduction and put
it onto your tax return. That'sdepreciation recapture. So let's
say, John, you bought theproperty for $275,000.
You owned it for 30 years. Youwrote the entire $275,000 off
(08:24):
over your lifetime. You getsmacked by a beer truck. John, I
know you like you know, you likesome darker beer, so let's what
kind of beer truck would youwant to take you out?
John Tripolsky (08:34):
Oh, man. Let's, let's say there's a Guinness rig
just rolling through town. Youknow, if you're gonna you know,
if you're but if I'm gonna goout by getting hit by a I mean,
Chris Picciurro (08:44):
maybe be like a a Patron truck or something.
John Tripolsky (08:47):
You know? Try to get real fancy and real real. A
little bit, Whatever. We'll go
Chris Picciurro (08:51):
next again. Before we go ground. We'll go
John Tripolsky (08:53):
for weeks. And, actually, before we jump into
this example too. So reallyquick. One thing, you know, we
mentioned before is, you know,that we mentioned long term
capital gains. And if I'munderstanding this still
correctly, right, long termcapital gains comes into effect
after 1 year of owning an asset.
Correct?
Chris Picciurro (09:07):
Short term for bringing that up.
John Tripolsky (09:08):
Is 0 0 to 1 year. Correct?
Chris Picciurro (09:10):
Correct. After 1 year, an asset gets long term
capital gain treatment, which ingeneral is about half of the tax
rate that you would payotherwise in general. There's a
lot of rules with it. Well, thecool thing is, let's say you
bought that property, owned itfor 30 years, you depreciated
the entire amount, John. Yougreedy pig.
You wrote off all $275,000. Youget smacked by a Guinness truck,
(09:34):
and, you know, your daughterinherits the property. Good for
her. Bad that you're gone. Iappreciate that.
Yeah. The property now is worth$500,000. Hey. Good job, John.
You made a good investment.
Guess what? 1, your daughtergets a basis of $500,000 and she
gets started if she keeps thisas a rental property. She can
(09:55):
start depreciating it all overagain at 500,000, and she does
not owe a penny of depreciationrecapture on the $275,000 that
you wrote off over yourlifetime. So the avoidance of
depreciation recapture is a thesecond big benefit. The third is
and this is kind of a dualbenefit with the IRS, it's a
(10:17):
simplification of taxcalculation.
How do you know how difficult itwould be to figure out what
someone's cost basis is ifsomeone passed away and they
bought something years yearsyears ago? Now rental property,
you usually have a depreciationschedule on your tax return,
but, John, I know I mean, reallife examples, both of our
grandparents, back in the day,bought stock, like stock
(10:42):
certificates. Right? Yes. It is.
Bonds, but mostly stockcertificates. And a lot of times
those stocks certificates, it'shard to determine how much they
paid for them. They weren'tthey're just sitting in in a
safety deposit box somewhere.Right? Or think about the
example, John.
Let's say you bought a mutualfund and you owned it for 20
years. And every year, thatmutual fund paid a little bit of
(11:04):
dividends and you justreinvested that dividend back in
to the mutual fund. It's verychallenging to figure out what
your cost basis is. So thesimplification of a tax
calculation, not having to worryabout what your the the
decedent's cost basis was is thethird benefit of a step up in
tax basis.
John Tripolsky (11:25):
And really everything that we've talked
about here. I mean, and to betotally honest, right? Again,
this is coming from somebodywho,
Chris Picciurro (11:32):
again, in all transparency, didn't know
John Tripolsky (11:34):
a lot about this before me and you were literally
talking about this right now.This really seems like this may
be one of the we'll call it anEaster egg or a surprise or
whatever the heck we wanna callthis thing, where the IRS is
they could have made this a lotmore or I should say a lot less
beneficial to the taxpayer. Thisis something I think that holds
so much weight. And it's almosta yeah. Know, we should be
(11:58):
thanking them in a sense for fordoing this because they really
don't have to in a sense.
Right? And oh, no. Go ahead.Right.
Chris Picciurro (12:05):
No. I'm sorry. I I I'm good at interrupting
you, so I'll do it again. No.No.
You're right. The the IRS, it issimplification for them and us
now, but spoiler alert, we'regonna do some deep dives later
this year into the presidentialcandidate's tax plans. And there
are some tax plans out therethat wanna eliminate the step up
(12:25):
in basis in in which there'ssome just like many tax laws,
there a lot of times there'sunintended consequences. Right?
But you're right.
It is a simplification. And sothe it does help the IRS
John Tripolsky (12:40):
a bit too. And let me let me ask you this
actually too. So this is, youknow, kind of you getting back
into your your private practicea little bit. So first question,
how long has this actually beenaround for? Is this is this
something that's new?
Is this something that'sprobably been around for a long
time? And if you know, youprobably don't even know that
because it's probably, you know,it's one of those things. It's
(13:02):
just here now, it's important,we focus on it. But more
importantly, how many timesthinking, you know, again, in
your private practice, peoplethat have say it's come, you
know, quote unquote tax time orthey've inherited something and
they don't know this exists. Andmaybe they, you know, were with
a a previous account before CPA,done all has done all their
(13:22):
preparing and you look at it andsay, well, what did you do with
this, you know, 2, 3, 4 yearsago?
Can you go back or did you orcan you or should you go back
and adjust for this? Or is thissomething that you kind of have
to jump on right away? Like, ifwe look at, you know, a 1031
exchange, it's not somethingthat you can, oh, crap. You
know, I missed the window. Ican't go back.
(13:42):
How does it look in this case?
Chris Picciurro (13:45):
Well, this has been around for at least 25
years. I don't know when exactlyit started, but I or at least as
as long as yeah. As I've been asI have been practicing. You
nailed it. I can't tell you howmany times we identify an error
on a tax return that's a pro taxpayer.
(14:06):
So I'll give you. And, yes, youcan amend your return in many
cases. Or in some cases, when itcomes down to real estate, you
can make an adjustment to yourdepreciation schedule using
what's called a 481 aadjustment. I I don't wanna get
too technical. So let's let'sthink about practical takeaways
for our listeners.
(14:28):
The first thing is when youinherit property, especially
stocks, mutual funds, etcetera,etcetera, don't take the cost
basis on the brokeragestatements as gospel because
sometimes those brokeragestatements have the original
cost basis before you inheritedthe property, and it's it might
report I mean, with with, youknow, a a cost basis that's much
(14:50):
lower than what the cost basisreally is when you inherited a
stock. So let's say let's say,John, you inherited a stock,
that was worth $1,5000 when youinherited it. Let's say your
parents bought it for 2,000 andyou just took over you know, the
you transferred that stock intoanother statement for you.
(15:11):
Right? They you were thebeneficiary of their brokerage
account.
Not all brokerages will adjustthe cost basis up to the new
owner's cost basis. So you goand sell it, and it looks like
you made 3 grand, but really youdidn't. So my my point is if you
are listening to this and youhave inherited assets,
(15:32):
especially in a brokerageaccount, let's start there, make
sure you talk to your taxprofessional and your financial
adviser to ensure that theproper cost basis is being
reported on those statements andthat if you sell it and it's
inherited, it's coded as a longterm capital gain. Now if you
(15:55):
own real estate, this is whereit gets really, really
interesting. If you own realestate that you inherited, make
sure that you started yourdepreciation schedule, meaning
when you're going to deduct itfrom the day you inherited it.
One more huge tidbit. If youlive in a community property
state, there's a chance that youcan get what's called a double
(16:17):
step up in basis. So let me walkyou through I said I'm gonna
have a real life example. Let mewalk you through an example.
Okay?
John, let's go back. Let's saythat you bought a property.
Let's say you and your lovelywife bought this $275,000
property, no land allocation. Wewant easy math. Right?
And you get a $10,000depreciation deduction every
(16:38):
year for that property. Okay?You guys own it jointly. You get
hit by a beer truck. Your wifesurvives.
Alright? And you've you've ownedit for 10 years. Well, what
would happen is she actuallyinherits half of the property
(17:00):
and she should step up half yourhalf on the tax return and reset
your depreciation schedule,which is huge. She's gonna get a
lot more deductions. She keepsher half of the depreciation
schedule on the same.
But let's say you live in Texas,a community property state. You
get smacked by a herd of cattleor an exotic animal down at our
(17:21):
friends at wildlife partners.Right? You get you you you were
knuckleheading around, you jumpa couple of fences, and you get
trampled. What what wouldtrample you over there?
I'm trying to remember some ofthose things, man.
John Tripolsky (17:32):
Pretty much every one of their every one of
them out of there is bigger andfaster than me. So pretty much
every one of them I could find away to, you know, stir the pot.
Chris Picciurro (17:40):
And you get, yeah, you get you get trampled.
And, but in Texas, right, sinceit's a community property state,
there's a good chance that shegets a she gets to step up the
basis of a 100% of the asset,meaning she gets to start fresh
and redepreciate that property,and let's say that property that
you bought for 2.70 is worth 500now, guess what? You get to
(18:03):
start fresh. $500,000, you startreset your depreciation
schedule. So the point is, ifyou own any type of rental
property and you are a widow oryou have inherited it, make sure
make sure that you, what wecall, review your depreciation
schedules or realistically haveyour tax professional review
(18:26):
your depreciation schedulesbecause you might not know what
the heck you're looking at.
In the state of Tennessee, andthis comes down to estate
planning also. So please reachout to our community. You know,
jump into our defeating taxesprivate group. John's gonna slap
me for mentioning it during theshow, but I'm gonna do it
anyway. There's a slap.
Some questions. So really focusbecause, like, in the state of
(18:48):
Tennessee, we're not a communityproperty state, but we have a
special trust here that givespeople a double step up in basis
even if they're not a residenthere. So there's some really
great estate planningopportunities for people as
well. So that's why, you know,people think step up in basis. I
haven't inherited anything.
(19:09):
Well, guess what? If you're awidow, you might have you might
have a step up in basis and youcould legally and ethically
reduce your tax you paid in yourlifetime with no out of pocket
cash. So at least once a month,John, someone in the teaching
tax law community comes to uswith a lot of times they'll come
to us with a question. Theymight be doing, John, you know,
I do a lot of 1 on 1 taxcoaching and tax their
personalized tax plans, Andsometimes they're asking me
(19:35):
questions about something likeretirement or stuff like that,
and I'm looking at thedepreciation schedule. I'm
saying, oh my gosh, guys.
We we have a ton of deductionssitting on the books that you
don't know about. And that'sactually a great kind of wrap up
on things too, Chris. And and
John Tripolsky (19:49):
do you know what make you feel better, man? You
know, being in Michigan still, Idon't think I don't think we're
a community property state, arewe?
Chris Picciurro (19:56):
No. I've been doing some due diligence, so
there's some opportunities forpeople to potentially create a
trust in a community propertystate even if we don't live in 1
and get the double double stepup of basis. So just reach out
to us, jump in our community.You know? Find and, John, can we
wrap on one really I know I usedsome examples with depreciation
(20:16):
and rental properties.
Let's use a super easyinheritance situation, okay, to
wrap on. So let's say you've gotlet's say you've got Cindy.
Cindy inherits a piece ofproperty from her grandmother.
Right? Grandmother bought it'sjust land so we're not dealing
with depreciation.
(20:37):
Cindy's grandma bought a plot ofland for $50 because her grandma
was gonna build a house on it,but grandma never built the
house on it. Grandma passesaway. Cindy inherits the land.
Now the land's worth $300,000Cindy could then go sell the
land for, let's say, for$300,000. She doesn't pay tax on
(21:01):
that $250,000 of gain.
And even if Cindy only owned theproperty for a month, it's still
long term capital gain if shehas a gain, or she could have a
capital loss if something wentdown after she inherited it. So
That's a great example. Very cutand dry for the most part. So I
(21:22):
think that's one, you know, thatthat we can relate to. And,
really, Chris, I think what'ssuper important about this
John Tripolsky (21:28):
this show, this topic is that, you know, what we
talked about is not atheoretical thing, right? Like 1
in a 1000000, this might happento a lot of people in here,
different things. Right? So Icould see this being super
beneficial, say to somebodywho's younger, maybe they just
have been DIYing their tax prepevery year. That's great.
(21:50):
Maybe work for them. Theyinherit something. They don't
know this exists. The softwareprobably doesn't know this
exists. Maybe even their taxprofessional they're working
with doesn't know that thisexists.
But super important. Right?Because this could literally I
mean, sure. In inheritance isjust that. It's it's great that
you're inheriting something, butthe likelihood that you're
(22:12):
inheriting it because of a badsituation is very high.
So make it a little bit better.But definitely tackle Chris,
what you said there too. If anyof those questions, defeating
taxes is the place, defeatingtaxes.com, go to that. Drives
you directly to the privateFacebook group. We make it short
and easy for you.
We are very efficient aroundhere, so we make it easy. That's
(22:32):
your private invite. If youdon't join, well, then, you
know, it's on you. Shame on you.And, you know, we're not
friends.
But in all seriousness, thankyou everybody for joining us
back here. We will see you backhere again as always, same time,
same place next week. Heyeverybody. John Topolsky here
(22:57):
still from the teaching tax flowteam. Couldn't get rid of me
that easy even though youprobably tried, but I know this
topic.
Actually, I'm gonna say, well,over half of you probably didn't
even know that this exists. Andlet's be honest, hopefully, you
don't need to, you know, knowthis for a little bit. But the
important thing about this isexactly what I'm about to tell
(23:18):
you. A lot of the things we talkabout here on the podcast is
really based around tax planningand strategy. If you're not
familiar with what that is, goback.
We did a couple shows, I think,a little bit earlier on, a few
months back. We really brokedown the difference between the
2 and, really, on every show wedo, I think a very important
takeaway from this one as wellspecifically is just
(23:41):
understanding that therelationship well, let's be
honest. The relationship you mayhave with your parents or your
family member, your in laws,whoever you may be inheriting
stuff from, you can control thata little bit. Maybe, maybe not.
But the honest truth is you canactually control the
relationship you have with theIRS by tax planning and
(24:03):
strategy.
So I'll leave it at that. Won'tdive into that. Totally
different topic, but everythingwe talk about here does relate
to that. Little bits and piecesevery week. We like to drip out
bringing in guests.
Obviously, Chris is welcome backhere anytime considering that it
is his show, but we look forwardto all those questions that
people in the community and thegeneral public have. We love
(24:24):
getting them. We love talkingabout them and we love
discussing them amongst our teamand our guests. So as always,
thank you again for joining ushere. We will see you very soon.
Disclaimer (24:36):
The content provided is for educational purposes
only. We encourage you to seekpersonalized investment advice
from your financialprofessional. For all tax and
legal advice, please consultyour CPA or attorney. Investment
advisory services are offeredthrough Cabin Advisors, a
registered investment adviser.Securities are offered through
Cabin Securities, a registeredbroker dealer.
The content of this podcast doesnot constitute an offer of
(24:57):
securities. Offerings can onlybe made through an offering
memorandum, and you shouldcarefully examine the risk
factors and other informationcontained in the memorandum.
Welcome to the Teaching Tax Flow podcast, where
the goal is to empower andeducate you to legally and
ethically minimize taxes paidover your lifetime.
Hey, everybody, and welcome backto Teaching Tax Flow, the
podcast today, episode 73. Weare gonna step up our game and
talk about the step up in basis,what that means if you even care
(00:28):
at all about taxes, and we knowyou do because you're here.
Before we get into the topic,though, let's take a brief
moment as always and thank oursponsor on this episode.
Ad Read (00:39):
This podcast is sponsored by The Mortgage Shop.
Are you looking to qualify foran investment credit loan
without jumping through hoops?That's easy. They have loans
with LTV up to 89.99%. Exploringtheir products and discovering
how they can work for you issimple. Just visit mortgage.shop
or call 865325256 6, and tellthem TTF sent you.
John Tripolsky (01:04):
Welcome. Welcome. Welcome back to the
Teaching Tax Flow podcast.Hopefully, you listened to the
intro. If not, we know you'reanxious.
You jump right into it. Today,step up in basis is on the
table. And Chris is back withus. Chris Picciurro, how are
you, man?
Chris Picciurro (01:20):
Oh, it's so good to be back, Johnny t. How
are you, my friend?
John Tripolsky (01:24):
Oh, it's Michigan. It's chilly, but it's
all good, man. It's all good.Let's warm up the plates and
talk about what in the world isstep up in basis. And, actually,
here's a little disclaimer on myend.
Right? Everybody knows I am notthe tax guy. You are the tax
guy. I am really not sure a 100%what this topic even is. So give
(01:45):
us your, well, call
Chris Picciurro (01:47):
it knowledge nugget, I guess, on what step up
in tax basis actually is. Thisis a confusing topic for many,
so even some tax professionals,and it's a topic that causes
people sometimes to pay too muchin tax. So we're gonna keep
things as as, elementary aspossible, because this is this
(02:11):
is a confusing topic, like Isaid. So here's the situation.
Let's start with basis, Okay.
First of all, before we talkabout step up in basis. Basis is
a term that we use in tax, andit's short for cost basis. So
really easy example, John. Let'ssay that you bought some, a
(02:34):
share of of Bitcoin
John Tripolsky (02:36):
Okay. Okay.
Chris Picciurro (02:38):
Or 1 Bitcoin for $30,000 and you go and sell
it for $60,000, okay, your costbasis for that Bitcoin is
$30,000. You sold it for$60,000. So to determine what
your capital gain is, so howmuch you pay tax on, you take
(02:59):
the 60,000 minus your cost basisof 30,000. Then, obviously, if
it's a long term gain long termgain or short term gain, it's
taxed differently. That's themost simplistic tax basis that
we can come up with.
Alright? So a step up in basisis a special rule in the tax
(03:20):
code that allows people toadjust their tax basis for any
asset that they inherited. Soyou're gonna hear a lot of times
people say, well, it's muchbetter to inherit assets than
than to receive them as a gift.Now I'm gonna talk about that,
you know, in our example. Soeveryone take a breath,
(03:41):
understand we're gonna gothrough a real life example.
Names have been hidden, but toreally explain the step up in
cost basis. So the bottom lineis when you inherit an asset,
now that asset could be thatthat that cryptocurrency, it
could be a home, it could be astock, It could be a piece of
(04:03):
artwork. Any asset. When youinherit that asset, your cost
basis, meaning what you've whatthe IRS is looking at or what
you've paid for that is whateverthe fair market value is at the
time someone passed away. And sothere's an adjustment.
(04:24):
So for someone inhering an assetfrom what we call a decedent,
usually, it's either could bethrough a a just a will, a
probate case, or a trust. Thetax basis of the asset gets
stepped up to fair market value.
John Tripolsky (04:41):
So I know on this, if anybody's a fan of
those true crime podcasts andyou talk about, you know, hey.
You're better to inherit thanbetter to, be gifted. We are not
implying you should go out andstart, you know, whacking your
in laws or anything. So this isnot a murder. No.
That
Chris Picciurro (04:59):
that that's not a it's
John Tripolsky (05:00):
not a a murder investor. Whatever. You get you
get where I'm going with this.Let's get back on topic. So,
yeah, walk us through this.
I'm super curious. I'm, like,super curious on how this works
because, right, this issomething that I'm gonna make
the assumption a lot of peopledon't even know exists. Right?
And and they just kind of assumethat things are gonna happen. So
this, I think, will lay levelthe playing field with a lot of
(05:23):
concerns, I should say.
Chris Picciurro (05:26):
Absolutely. Because a lot of tax software,
even if you're a self prepareror if you're someone that
prepares taxes professionally,even those, a lot of times,
those softwares don't trigger tofigure out what a you know, if
the asset's been stepped up. Sothere are 3 real big benefits of
a step up in basis, and there'sa reason. Remember, one of the
(05:47):
three laws of teaching tax flowis that tax laws are written to
encourage or discourage certainbehavior, so we want to inherit
assets. We also know that theIRS wants some type of
simplicity.
Now if you're snickering whenyou hear that, we understand,
but let me explain. So there's 3main benefits of a step up in
basis. The first one is areduced capital gain. Right? So,
(06:08):
John, let's let's say you hadthat that that share of Bitcoin,
you paid 6 $30,000, it's worth60,000, you you, get hit by a
beer truck.
You know you know how that's howI like to knock people out.
Right? And, your daughterinherits it. Okay? Some reason
Stacy doesn't inherit it.
Let just go with it. Yourdaughter inherits it. She sells
(06:33):
it the next day for $60,100.Okay? She gets her cost basis is
60,000 because that's what itwas worth when you got hit by
the beer truck.
She only pays tax on a $100,thus reduced capital gain. She
sells it for $60,100. Her eventhough you paid 30, her basis is
(06:55):
60. So a reduced capital gaincalculation is huge, and this is
something that people don't knowthat, about. Any inherited
assets are automaticallyconsidered long term capital
gains, which we know are thelower rates.
So you even if you inheritedasset, you don't have to keep it
(07:17):
for a year to get the long termcapital gain treatment. So one
is reduced capital gain. Number2 really plays a role when we're
talking about real estate or anytype of, like, business
equipment. The avoidance ofdepreciation recapture. Oh my
gosh.
What's depreciation recapture?Should we do another episode on
that? We probably should. Here'swhat depreciation recapture is.
(07:40):
If you have an asset let's use aeasy example.
Let's say you bought a rentalproperty for $275,000 and there
is no land allocation, soexactly $10,000 depreciation
every year. Let's say you ownthat property. You bought it for
2.75. You owned it for 10 years.You took a $100,000 of
(08:00):
depreciation deduction.
Right? So you've written thatdeducted that on your tax
return. When you sell theproperty, you have to recapture
or take that $100,000 ofdepreciation deduction and put
it onto your tax return. That'sdepreciation recapture. So let's
say, John, you bought theproperty for $275,000.
You owned it for 30 years. Youwrote the entire $275,000 off
(08:24):
over your lifetime. You getsmacked by a beer truck. John, I
know you like you know, you likesome darker beer, so let's what
kind of beer truck would youwant to take you out?
John Tripolsky (08:34):
Oh, man. Let's, let's say there's a Guinness rig
just rolling through town. Youknow, if you're gonna you know,
if you're but if I'm gonna goout by getting hit by a I mean,
Chris Picciurro (08:44):
maybe be like a a Patron truck or something.
John Tripolsky (08:47):
You know? Try to get real fancy and real real. A
little bit, Whatever. We'll go
Chris Picciurro (08:51):
next again. Before we go ground. We'll go
John Tripolsky (08:53):
for weeks. And, actually, before we jump into
this example too. So reallyquick. One thing, you know, we
mentioned before is, you know,that we mentioned long term
capital gains. And if I'munderstanding this still
correctly, right, long termcapital gains comes into effect
after 1 year of owning an asset.
Correct?
Chris Picciurro (09:07):
Short term for bringing that up.
John Tripolsky (09:08):
Is 0 0 to 1 year. Correct?
Chris Picciurro (09:10):
Correct. After 1 year, an asset gets long term
capital gain treatment, which ingeneral is about half of the tax
rate that you would payotherwise in general. There's a
lot of rules with it. Well, thecool thing is, let's say you
bought that property, owned itfor 30 years, you depreciated
the entire amount, John. Yougreedy pig.
You wrote off all $275,000. Youget smacked by a Guinness truck,
(09:34):
and, you know, your daughterinherits the property. Good for
her. Bad that you're gone. Iappreciate that.
Yeah. The property now is worth$500,000. Hey. Good job, John.
You made a good investment.
Guess what? 1, your daughtergets a basis of $500,000 and she
gets started if she keeps thisas a rental property. She can
(09:55):
start depreciating it all overagain at 500,000, and she does
not owe a penny of depreciationrecapture on the $275,000 that
you wrote off over yourlifetime. So the avoidance of
depreciation recapture is a thesecond big benefit. The third is
and this is kind of a dualbenefit with the IRS, it's a
(10:17):
simplification of taxcalculation.
How do you know how difficult itwould be to figure out what
someone's cost basis is ifsomeone passed away and they
bought something years yearsyears ago? Now rental property,
you usually have a depreciationschedule on your tax return,
but, John, I know I mean, reallife examples, both of our
grandparents, back in the day,bought stock, like stock
(10:42):
certificates. Right? Yes. It is.
Bonds, but mostly stockcertificates. And a lot of times
those stocks certificates, it'shard to determine how much they
paid for them. They weren'tthey're just sitting in in a
safety deposit box somewhere.Right? Or think about the
example, John.
Let's say you bought a mutualfund and you owned it for 20
years. And every year, thatmutual fund paid a little bit of
(11:04):
dividends and you justreinvested that dividend back in
to the mutual fund. It's verychallenging to figure out what
your cost basis is. So thesimplification of a tax
calculation, not having to worryabout what your the the
decedent's cost basis was is thethird benefit of a step up in
tax basis.
John Tripolsky (11:25):
And really everything that we've talked
about here. I mean, and to betotally honest, right? Again,
this is coming from somebodywho,
Chris Picciurro (11:32):
again, in all transparency, didn't know
John Tripolsky (11:34):
a lot about this before me and you were literally
talking about this right now.This really seems like this may
be one of the we'll call it anEaster egg or a surprise or
whatever the heck we wanna callthis thing, where the IRS is
they could have made this a lotmore or I should say a lot less
beneficial to the taxpayer. Thisis something I think that holds
so much weight. And it's almosta yeah. Know, we should be
(11:58):
thanking them in a sense for fordoing this because they really
don't have to in a sense.
Right? And oh, no. Go ahead.Right.
Chris Picciurro (12:05):
No. I'm sorry. I I I'm good at interrupting
you, so I'll do it again. No.No.
You're right. The the IRS, it issimplification for them and us
now, but spoiler alert, we'regonna do some deep dives later
this year into the presidentialcandidate's tax plans. And there
are some tax plans out therethat wanna eliminate the step up
(12:25):
in basis in in which there'ssome just like many tax laws,
there a lot of times there'sunintended consequences. Right?
But you're right.
It is a simplification. And sothe it does help the IRS
John Tripolsky (12:40):
a bit too. And let me let me ask you this
actually too. So this is, youknow, kind of you getting back
into your your private practicea little bit. So first question,
how long has this actually beenaround for? Is this is this
something that's new?
Is this something that'sprobably been around for a long
time? And if you know, youprobably don't even know that
because it's probably, you know,it's one of those things. It's
(13:02):
just here now, it's important,we focus on it. But more
importantly, how many timesthinking, you know, again, in
your private practice, peoplethat have say it's come, you
know, quote unquote tax time orthey've inherited something and
they don't know this exists. Andmaybe they, you know, were with
a a previous account before CPA,done all has done all their
(13:22):
preparing and you look at it andsay, well, what did you do with
this, you know, 2, 3, 4 yearsago?
Can you go back or did you orcan you or should you go back
and adjust for this? Or is thissomething that you kind of have
to jump on right away? Like, ifwe look at, you know, a 1031
exchange, it's not somethingthat you can, oh, crap. You
know, I missed the window. Ican't go back.
(13:42):
How does it look in this case?
Chris Picciurro (13:45):
Well, this has been around for at least 25
years. I don't know when exactlyit started, but I or at least as
as long as yeah. As I've been asI have been practicing. You
nailed it. I can't tell you howmany times we identify an error
on a tax return that's a pro taxpayer.
(14:06):
So I'll give you. And, yes, youcan amend your return in many
cases. Or in some cases, when itcomes down to real estate, you
can make an adjustment to yourdepreciation schedule using
what's called a 481 aadjustment. I I don't wanna get
too technical. So let's let'sthink about practical takeaways
for our listeners.
(14:28):
The first thing is when youinherit property, especially
stocks, mutual funds, etcetera,etcetera, don't take the cost
basis on the brokeragestatements as gospel because
sometimes those brokeragestatements have the original
cost basis before you inheritedthe property, and it's it might
report I mean, with with, youknow, a a cost basis that's much
(14:50):
lower than what the cost basisreally is when you inherited a
stock. So let's say let's say,John, you inherited a stock,
that was worth $1,5000 when youinherited it. Let's say your
parents bought it for 2,000 andyou just took over you know, the
you transferred that stock intoanother statement for you.
(15:11):
Right? They you were thebeneficiary of their brokerage
account.
Not all brokerages will adjustthe cost basis up to the new
owner's cost basis. So you goand sell it, and it looks like
you made 3 grand, but really youdidn't. So my my point is if you
are listening to this and youhave inherited assets,
(15:32):
especially in a brokerageaccount, let's start there, make
sure you talk to your taxprofessional and your financial
adviser to ensure that theproper cost basis is being
reported on those statements andthat if you sell it and it's
inherited, it's coded as a longterm capital gain. Now if you
(15:55):
own real estate, this is whereit gets really, really
interesting. If you own realestate that you inherited, make
sure that you started yourdepreciation schedule, meaning
when you're going to deduct itfrom the day you inherited it.
One more huge tidbit. If youlive in a community property
state, there's a chance that youcan get what's called a double
(16:17):
step up in basis. So let me walkyou through I said I'm gonna
have a real life example. Let mewalk you through an example.
Okay?
John, let's go back. Let's saythat you bought a property.
Let's say you and your lovelywife bought this $275,000
property, no land allocation. Wewant easy math. Right?
And you get a $10,000depreciation deduction every
(16:38):
year for that property. Okay?You guys own it jointly. You get
hit by a beer truck. Your wifesurvives.
Alright? And you've you've ownedit for 10 years. Well, what
would happen is she actuallyinherits half of the property
(17:00):
and she should step up half yourhalf on the tax return and reset
your depreciation schedule,which is huge. She's gonna get a
lot more deductions. She keepsher half of the depreciation
schedule on the same.
But let's say you live in Texas,a community property state. You
get smacked by a herd of cattleor an exotic animal down at our
(17:21):
friends at wildlife partners.Right? You get you you you were
knuckleheading around, you jumpa couple of fences, and you get
trampled. What what wouldtrample you over there?
I'm trying to remember some ofthose things, man.
John Tripolsky (17:32):
Pretty much every one of their every one of
them out of there is bigger andfaster than me. So pretty much
every one of them I could find away to, you know, stir the pot.
Chris Picciurro (17:40):
And you get, yeah, you get you get trampled.
And, but in Texas, right, sinceit's a community property state,
there's a good chance that shegets a she gets to step up the
basis of a 100% of the asset,meaning she gets to start fresh
and redepreciate that property,and let's say that property that
you bought for 2.70 is worth 500now, guess what? You get to
(18:03):
start fresh. $500,000, you startreset your depreciation
schedule. So the point is, ifyou own any type of rental
property and you are a widow oryou have inherited it, make sure
make sure that you, what wecall, review your depreciation
schedules or realistically haveyour tax professional review
(18:26):
your depreciation schedulesbecause you might not know what
the heck you're looking at.
In the state of Tennessee, andthis comes down to estate
planning also. So please reachout to our community. You know,
jump into our defeating taxesprivate group. John's gonna slap
me for mentioning it during theshow, but I'm gonna do it
anyway. There's a slap.
Some questions. So really focusbecause, like, in the state of
(18:48):
Tennessee, we're not a communityproperty state, but we have a
special trust here that givespeople a double step up in basis
even if they're not a residenthere. So there's some really
great estate planningopportunities for people as
well. So that's why, you know,people think step up in basis. I
haven't inherited anything.
(19:09):
Well, guess what? If you're awidow, you might have you might
have a step up in basis and youcould legally and ethically
reduce your tax you paid in yourlifetime with no out of pocket
cash. So at least once a month,John, someone in the teaching
tax law community comes to uswith a lot of times they'll come
to us with a question. Theymight be doing, John, you know,
I do a lot of 1 on 1 taxcoaching and tax their
personalized tax plans, Andsometimes they're asking me
(19:35):
questions about something likeretirement or stuff like that,
and I'm looking at thedepreciation schedule. I'm
saying, oh my gosh, guys.
We we have a ton of deductionssitting on the books that you
don't know about. And that'sactually a great kind of wrap up
on things too, Chris. And and
John Tripolsky (19:49):
do you know what make you feel better, man? You
know, being in Michigan still, Idon't think I don't think we're
a community property state, arewe?
Chris Picciurro (19:56):
No. I've been doing some due diligence, so
there's some opportunities forpeople to potentially create a
trust in a community propertystate even if we don't live in 1
and get the double double stepup of basis. So just reach out
to us, jump in our community.You know? Find and, John, can we
wrap on one really I know I usedsome examples with depreciation
(20:16):
and rental properties.
Let's use a super easyinheritance situation, okay, to
wrap on. So let's say you've gotlet's say you've got Cindy.
Cindy inherits a piece ofproperty from her grandmother.
Right? Grandmother bought it'sjust land so we're not dealing
with depreciation.
(20:37):
Cindy's grandma bought a plot ofland for $50 because her grandma
was gonna build a house on it,but grandma never built the
house on it. Grandma passesaway. Cindy inherits the land.
Now the land's worth $300,000Cindy could then go sell the
land for, let's say, for$300,000. She doesn't pay tax on
(21:01):
that $250,000 of gain.
And even if Cindy only owned theproperty for a month, it's still
long term capital gain if shehas a gain, or she could have a
capital loss if something wentdown after she inherited it. So
That's a great example. Very cutand dry for the most part. So I
(21:22):
think that's one, you know, thatthat we can relate to. And,
really, Chris, I think what'ssuper important about this
John Tripolsky (21:28):
this show, this topic is that, you know, what we
talked about is not atheoretical thing, right? Like 1
in a 1000000, this might happento a lot of people in here,
different things. Right? So Icould see this being super
beneficial, say to somebodywho's younger, maybe they just
have been DIYing their tax prepevery year. That's great.
(21:50):
Maybe work for them. Theyinherit something. They don't
know this exists. The softwareprobably doesn't know this
exists. Maybe even their taxprofessional they're working
with doesn't know that thisexists.
But super important. Right?Because this could literally I
mean, sure. In inheritance isjust that. It's it's great that
you're inheriting something, butthe likelihood that you're
(22:12):
inheriting it because of a badsituation is very high.
So make it a little bit better.But definitely tackle Chris,
what you said there too. If anyof those questions, defeating
taxes is the place, defeatingtaxes.com, go to that. Drives
you directly to the privateFacebook group. We make it short
and easy for you.
We are very efficient aroundhere, so we make it easy. That's
(22:32):
your private invite. If youdon't join, well, then, you
know, it's on you. Shame on you.And, you know, we're not
friends.
But in all seriousness, thankyou everybody for joining us
back here. We will see you backhere again as always, same time,
same place next week. Heyeverybody. John Topolsky here
(22:57):
still from the teaching tax flowteam. Couldn't get rid of me
that easy even though youprobably tried, but I know this
topic.
Actually, I'm gonna say, well,over half of you probably didn't
even know that this exists. Andlet's be honest, hopefully, you
don't need to, you know, knowthis for a little bit. But the
important thing about this isexactly what I'm about to tell
(23:18):
you. A lot of the things we talkabout here on the podcast is
really based around tax planningand strategy. If you're not
familiar with what that is, goback.
We did a couple shows, I think,a little bit earlier on, a few
months back. We really brokedown the difference between the
2 and, really, on every show wedo, I think a very important
takeaway from this one as wellspecifically is just
(23:41):
understanding that therelationship well, let's be
honest. The relationship you mayhave with your parents or your
family member, your in laws,whoever you may be inheriting
stuff from, you can control thata little bit. Maybe, maybe not.
But the honest truth is you canactually control the
relationship you have with theIRS by tax planning and
(24:03):
strategy.
So I'll leave it at that. Won'tdive into that. Totally
different topic, but everythingwe talk about here does relate
to that. Little bits and piecesevery week. We like to drip out
bringing in guests.
Obviously, Chris is welcome backhere anytime considering that it
is his show, but we look forwardto all those questions that
people in the community and thegeneral public have. We love
(24:24):
getting them. We love talkingabout them and we love
discussing them amongst our teamand our guests. So as always,
thank you again for joining ushere. We will see you very soon.
Disclaimer (24:36):
The content provided is for educational purposes
only. We encourage you to seekpersonalized investment advice
from your financialprofessional. For all tax and
legal advice, please consultyour CPA or attorney. Investment
advisory services are offeredthrough Cabin Advisors, a
registered investment adviser.Securities are offered through
Cabin Securities, a registeredbroker dealer.
The content of this podcast doesnot constitute an offer of
(24:57):
securities. Offerings can onlybe made through an offering
memorandum, and you shouldcarefully examine the risk
factors and other informationcontained in the memorandum.
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