The Step-Up in Basis at Death: A Powerful Estate Planning Benefit for Real Estate Investors

The Step-Up in Basis at Death: A Powerful Estate Planning Benefit for Real Estate Investors

When it comes to passing wealth to heirs, real estate offers a little-known but powerful tax advantage: the step-up in basis at death. For investors—especially those involved in long-term real estate holds or syndications—this rule can effectively eliminate decades of unrealized capital gains for beneficiaries. Here’s how it works.

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What Is a Step-Up in Basis?

“Basis” is essentially your investment in a property for tax purposes. It starts with your original purchase price, plus improvements and less depreciation. When you sell, your capital gain is the difference between your sales price and your adjusted basis.

Upon death, however, the IRS allows a “step-up” in basis. The property’s basis is adjusted (i.e., “stepped up”) to its fair market value (FMV) on the date of death. This means any unrealized gains from appreciation during the decedent’s lifetime are effectively erased for tax purposes.

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Example: A Simple Case

Let’s say Sarah purchased a duplex in Raleigh, NC for $400,000 in 2000. Over time, the property appreciated in value and is worth $1,100,000 at the time of her death in 2025.

• Original purchase price: $400,000
• Depreciation claimed: $200,000
• Adjusted basis: $200,000
• Fair market value at death: $1,100,000

If Sarah’s heirs sell the property shortly after her death for $1,100,000, they would owe no capital gains tax, because their new stepped-up basis equals the FMV at death.

Had Sarah sold it herself, she would’ve faced capital gains tax on the $900,000 in gain ($1.1M – $200K), minus any exclusions or deductions.

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What If the Property Is Held Through a Syndication?

This benefit still applies—but with a twist.

In a real estate syndication, you don’t own a building directly; you own a fractional interest in an entity (often an LLC or LP) that owns the property. For tax purposes, your ownership interest in the underlying real estate (and the depreciation you’ve claimed over time) is passed through to you as a member or partner.

When you pass away:

• Your partnership or membership interest receives a step-up in basis to the FMV at the date of death.
• This stepped-up basis includes both your share of the property’s value and your share of depreciation that was claimed.
• Your heirs inherit this interest at its stepped-up basis, and if they sell their interest or if the underlying property is sold and liquidated shortly after your death, they will owe little or no capital gains tax.

Example: Syndicated Interest

James invested $100,000 in a multifamily syndication in 2010. His share of the property is now worth $250,000, but due to depreciation, his basis has fallen to $30,000.

At death, his interest is stepped up to $250,000. If the syndication later liquidates and his heirs receive $250,000, no capital gains tax is owed. The depreciation recapture is also effectively erased, thanks to the step-up.

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Why It Matters for Real Estate Investors

The step-up in basis at death:

• Wipes out capital gains taxes for heirs
• Erases depreciation recapture, which would otherwise be taxed at up to 25%
• Makes long-term real estate holds an excellent estate planning tool

Combined with the power of leverage and tax-deferred growth, this creates a compelling case for long-term, multigenerational real estate investing—even (or especially) through syndications.

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Caveats and Planning Tips

• If assets are held in joint tenancy with right of survivorship, only half the property may receive a step-up.
• Community property states may allow a full step-up, even for jointly owned assets.
• This rule can be affected by potential tax law changes, especially discussions around wealth taxes or basis reform.
• Trust and estate attorneys can help structure ownership to maximize this benefit.

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Final Thoughts

In a world where tax efficiency matters, the step-up in basis at death is one of the most generous estate planning tools available to real estate investors. Whether you own property outright or through a syndicated deal, this rule can preserve—and transfer—wealth to your heirs far more efficiently than liquid financial assets.