Should You Sell Property in Your Trust? Why Step-Up in Basis Could Save Your Family Thousands

Hi friends,

A client stopped by the office recently because she was thinking about selling her vacation home. She and her husband had owned it for years, but they weren't using it very often anymore. She thought it was the right time to simplify life and wanted to make things easier for her children down the road. What she hadn't considered was how selling the property now could affect the taxes her family might pay later.

As we reviewed her situation, it reminded me of something I see fairly often. People spend a lot of time deciding whether to sell a property, but don't always realize that when they sell can sometimes make a significant financial difference. One of the biggest reasons is something called step-up in basis.

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Quick Summary

If you own property that's increased significantly in value over the years, don't assume selling it now is automatically the best choice. Depending on your circumstances, waiting could provide important tax benefits for your heirs through something called a step-up in basis. Before making a decision, it's worth understanding how it works.

So, What Is Step-Up in Basis?

Step-up in basis is one of those tax terms that sounds intimidating, but the idea is actually pretty straightforward.

When you purchase property, your starting value for tax purposes is generally what you paid for it, plus certain improvements you've made over the years. That number is called your basis. If you later sell the property, capital gains tax is generally based on the difference between that adjusted basis and the selling price.

Now let's imagine something different.

Suppose you purchased a cabin many years ago for $180,000, and today it's worth $900,000. If you sold it today, there could be a substantial taxable gain.

If that same property is inherited and qualifies for a step-up in basis, the tax basis may instead be adjusted to its fair market value at the owner's date of death. If it's sold shortly afterward for about that same value, the taxable gain could be much smaller.

That's why this conversation is so important. The timing of a sale may affect the amount of tax paid.

It Isn't Just Vacation Homes

Although my client owned a vacation home, the same issue can come up with rental property, vacant land, a second home, stocks in your brokerage account or even a family home that's appreciated over many years. If you've owned property for a long time, it's worth understanding the tax consequences before making the decision to sell.

I also hear people assume that because a property is in a trust, the tax rules automatically work a certain way. In reality, many families have revocable living trusts, but being in a trust doesn't automatically determine whether a step-up in basis applies. Every situation is different, which is why it's important to look at the whole picture before putting a property on the market.

Before You Decide to Sell

The client who inspired this article didn't leave with a recommendation to sell or to keep the property. Instead, she left with a better understanding of her options. Sometimes selling now is absolutely the right decision. Other times, waiting may provide significant tax advantages for your family. The important part is knowing the difference before the sale is final.

If you're considering selling appreciated property, whether it's a vacation home, rental property, land, or another valuable asset, this is a great time to schedule a Tax Consulting & Optimization Session. A little planning today may help you avoid an unexpected tax bill tomorrow.

If you'd like to review your situation, Contact Apple Blossom Tax Service before you make a final decision. We're happy to help you understand your options so you can move forward with confidence.

For additional information about how the IRS determines the basis of inherited property, you can also review IRS Publication 551, Basis of Assets. It provides the official IRS guidance on basis and inherited property for those who would like to learn more.

House for sale on a lake

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Frequently Asked Questions

Does everyone receive a step-up in basis?

Not always. Whether a property qualifies depends on several factors, including how it was owned and your individual circumstances. That's why it's important to review your situation before making any decisions.

Does putting my property into a trust automatically give it a step-up in basis?

No. Many people assume that simply placing property into a trust changes the tax treatment, but that's not necessarily the case. The type of trust and your overall estate plan can affect how the rules apply.

Should I wait to sell my property?

Maybe, but there isn't a one-size-fits-all answer. For some families, selling now is the best decision. For others, waiting may provide important tax benefits. Before you decide, it's worth understanding how the timing of the sale could affect your taxes.

Does this only apply to vacation homes?

No. Step-up in basis may apply to many types of appreciated property, including rental properties, vacant land, second homes, stocks in your brokerage account and in some cases your primary residence. If a property has increased significantly in value over the years, it's worth asking how the tax rules apply.

What if I don't know what I originally paid for the property?

Don't panic. There are often ways to reconstruct your basis using closing documents, tax records, improvement receipts, or other available information. A tax professional can help you determine what documentation may be available.

When should I talk to a tax professional?

The best time is before you list the property for sale. Once the sale is complete, planning opportunities may be limited. Reviewing your options in advance can help you make an informed decision and avoid unexpected tax surprises.

How can Apple Blossom Tax Service help?

Every family's situation is different. During a Tax Consulting & Optimization Session, we can review your property, discuss the potential tax implications of selling, and help you understand your options before you make a final decision.

Warmly,

Melissa Ochoa

Enrolled Agent & Owner, Apple Blossom Tax Service

Serving Sebastopol and Sonoma County