What does a step-up in tax basis allow for?

What does a step-up in tax basis allow for?

• A. A higher tax rate on asset sale
• B. Increased depreciation based on purchase price
• C. Elimination of capital gains tax
• D. Reduction of taxable income

Answer: (B)

A step-up in tax basis allows for increased depreciation based on the purchase price of an asset. When an asset is acquired, the tax basis is typically set to the purchase price. If the asset has appreciated in value since its original acquisition, the new owner can use this stepped-up basis for depreciation purposes, effectively allowing for larger depreciation deductions on their tax returns. This means that the taxpayer can recover the cost of the asset over its useful life, reducing taxable income. For example, if real estate is purchased for a higher price than what the previous owner paid, the new owner can depreciate that higher amount, resulting in increased deductions compared to if they were limited to the original basis. This situation often arises in estate planning, where the basis of inherited property is typically stepped up to its fair market value at the time of the previous owner’s death, creating significant tax advantages for the heirs. The other options do not accurately reflect the effects of a step-up in basis. A higher tax rate or elimination of capital gains tax are not direct consequences of a step-up in basis; rather, a step-up can help reduce taxable income by increasing depreciation but does not eliminate capital gains tax on the eventual sale of the asset. Additionally, while a reduction of taxable

A step-up in tax basis allows for increased depreciation based on the purchase price of an asset. When an asset is acquired, the tax basis is typically set to the purchase price. If the asset has appreciated in value since its original acquisition, the new owner can use this stepped-up basis for depreciation purposes, effectively allowing for larger depreciation deductions on their tax returns. This means that the taxpayer can recover the cost of the asset over its useful life, reducing taxable income.

For example, if real estate is purchased for a higher price than what the previous owner paid, the new owner can depreciate that higher amount, resulting in increased deductions compared to if they were limited to the original basis. This situation often arises in estate planning, where the basis of inherited property is typically stepped up to its fair market value at the time of the previous owner’s death, creating significant tax advantages for the heirs.

The other options do not accurately reflect the effects of a step-up in basis. A higher tax rate or elimination of capital gains tax are not direct consequences of a step-up in basis; rather, a step-up can help reduce taxable income by increasing depreciation but does not eliminate capital gains tax on the eventual sale of the asset. Additionally, while a reduction of taxable