How Does Step-up Basis Work in an S-Corp?

POSTED ON: July 2, 2021

My sister, her husband and I own an S Corporation with 25%, 25% and 50% ownership, respectively. The S Corporation invests in rental properties. My brother-in-law passed away earlier this year, so does my sister get a step-up in basis for her husband’s portion?

How Does Step-up Basis Work in an S-Corp?

Nj.com’s recent article entitled “Will there be a step-up in basis for this inheritance?” explains that the basis of property inherited from a decedent is generally the fair market value of the property on the date of the person’s death. This is known as a step-up in basis.

A step-up in basis is readjusting the value of an appreciated asset for tax purposes, when it’s inherited. The higher market value of the asset at the time of inheritance is considered for tax purposes.

When an asset (like a house) is transferred to a beneficiary, its value is typically more than what it was when the original owner purchased it.

The asset gets a step-up in basis, so the beneficiary’s capital gains tax is reduced or eliminated. A step-up in basis is applied to the cost basis of property transferred at death.

For example, if a person purchased a home for $80,000 many years ago, but the home is worth $200,000, the client is looking at a “step up” of $120,000.  There are only certain ways to qualify for this step up, and you should have a tax attorney advise you on how to do so.

Tax basis is the dollar amount of a taxpayer’s investment in a certain asset or property. It is typically calculated for tax purposes, like calculating depreciation, amortization and other property dispositions.

In some instances, the fair market value at the time of death may be less than the decedent’s tax basis.

Stock in S-Corporations will also get a step-up in basis when inherited.  However, the assets inside of the S-Corporation will not get the same step up in basis.  This is why only certain kinds of assets should be held in an S-Corporation.  Without proper planning with a knowledgeable tax attorney, there might be an exit tax on the liquidation or sale of the S-Corporation, even if there is a step up in basis.

Keep in mind that assets such as IRAs or annuities, don’t get the step-up because those types of assets are considered income in respect of the decedent.

Talk to tax attorney Ted Vicknair about the particular tax issues you may be faced with in respect to your S-Corporation or C-Corporation or LLC by BOOKING A CALL.

Reference: nj.com (May 10, 2021) “Will there be a step-up in basis for this inheritance?”

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