Definition
Stepped-up basis is a tax provision under IRC Section 1014 that adjusts the cost basis of inherited property to its fair market value on the date of the decedent’s death. This adjustment eliminates capital gains tax on appreciation that occurred during the original owner’s lifetime, providing significant tax benefits to heirs.
Significance in Alternative Asset Valuation
For alternative assets like art, collectibles, wine, and luxury goods, stepped-up basis can represent substantial tax savings. A painting purchased for $10,000 that’s worth $500,000 at death receives a new basis of $500,000 for the heir. Without proper valuation documentation, the IRS may challenge the stepped-up basis, potentially costing heirs thousands in unnecessary taxes.
The IRS requires qualified appraisals for estate tax purposes when assets exceed certain thresholds, making accurate valuation critical for establishing the new basis. Alternative assets present unique challenges because they often lack liquid markets and standardized pricing, requiring specialized expertise to determine fair market value.
Estate planners frequently recommend obtaining professional appraisals before death to establish valuation baselines and avoid disputes with the IRS. This is particularly important for collections or unique items where values can be subjective.
How Impossival Approaches This
We provide defensible valuations that meet IRS requirements for establishing stepped-up basis. Our AI-powered platform analyzes market data, comparable sales, and condition factors to generate appraisals that can withstand IRS scrutiny. We maintain detailed documentation of our methodology to support basis adjustments during estate administration.
Related Concepts
- Fair Market Value - The standard used to determine the new basis
- Estate Tax - Federal tax that triggers stepped-up basis rules
- Cost Basis - The original tax basis that gets adjusted
- Qualified Appraisal - Required documentation for substantial assets