How Does A Step Up In Basis Work?
Capital gains taxes are one of the more confusing taxes that American citizens have to pay. The best way to explain capital gains taxes is through examples. This article will include plenty of examples, but in an attempt to define these taxes, capital gains taxes are the tax accessed on an asset when it is sold and has increased in value.
Capital gains taxes are a percentage of what a person buys the asset for (the “basis”) and what the amount the property was sold at (the “step-up”). Most assets have a tax basis, and generally, this is the amount a person paid for the property originally. When you inherit an asset, the basis is usually set at the amount the property is worth on the day of the transfer.
It is important to know how much an asset is worth on either the day the asset was purchased or on the day the owner dies and the property is transferred. Once the property is sold, the tax will be accessed on the difference between the first value and the amount the property was sold for. Most people pay about 15 percent on the difference. Higher earners may have to pay as much as 23.8 percent capital gains tax.