Understanding the Capital Gains Reset at Death: A Key Estate Planning Tool
At Cool Wealth Management in Phoenix, Arizona, we help clients navigate complex financial landscapes, including the often-overlooked benefits of the capital gains reset at death. This powerful tax rule, also known as the stepped-up basis, can significantly reduce tax liabilities for heirs. By understanding how it works, you can make informed estate planning decisions to preserve your wealth. In this article, we’ll explain the capital gains reset, its implications, and how our Phoenix-based financial advisors can help you leverage it effectively.
What Is the Capital Gains Reset at Death?
When someone passes away, the assets they leave behind, such as stocks, real estate, or other investments, often receive a “stepped-up basis” for tax purposes. This means the asset’s cost basis—the original value used to calculate capital gains—is adjusted to its fair market value (FMV) at the date of death (or, in some cases, an alternate valuation date six months later).
For example, suppose you purchased a home in Phoenix for $200,000, and at the time of your passing, it’s worth $500,000. If you sold the home during your lifetime, you’d face capital gains tax on the $300,000 gain. However, if the home is inherited, the beneficiary’s cost basis becomes $500,000. If they sell it immediately for $500,000, they owe no capital gains tax because there’s no gain relative to the stepped-up basis.
Why the Stepped-Up Basis Matters
The capital gains reset is a cornerstone of tax-efficient estate planning. Without it, heirs could face significant tax burdens on inherited assets, especially if those assets appreciated substantially over time. By resetting the basis to the FMV at death, the IRS effectively eliminates capital gains tax on appreciation that occurred during the decedent’s lifetime. This can save families thousands, if not millions, in taxes, particularly for high-value assets like real estate in Phoenix’s booming market or long-held investment portfolios.
How It Works in Practice
Let’s consider another example. Imagine a client of Cool Wealth Management who bought stock in a tech company for $50,000 decades ago. At the time of their death, the stock is worth $1 million. Their heir inherits the stock with a stepped-up basis of $1 million. If the heir sells the stock for $1.05 million shortly after, they only pay capital gains tax on the $50,000 gain since the inheritance, not the $950,000 gain from the original purchase price.
This rule applies to most appreciated assets, including:
Real estate: Primary residences, vacation homes, or investment properties.
Stocks and bonds: Individual securities or mutual funds.
Business interests: Shares in closely held businesses.
Collectibles: Art, antiques, or other valuable items.
However, not all assets qualify for a stepped-up basis. For instance, assets held in certain trusts or retirement accounts like IRAs and 401(k)s may follow different tax rules. Consulting with a financial advisor in Phoenix, like those at Cool Wealth Management, can help clarify which assets are eligible.Exceptions and LimitationsWhile the stepped-up basis is a powerful tool, there are nuances to consider:
Community Property States: Arizona is a community property state, which offers an additional benefit. For married couples, both halves of community property receive a stepped-up basis upon the death of one spouse, not just the deceased spouse’s share. This can double the tax savings for surviving spouses.
Alternate Valuation Date: If the estate qualifies, executors can choose to value assets six months after the date of death. This can be beneficial if asset values decline post-death, further reducing potential capital gains.
Assets Not Eligible: Certain assets, like cash or assets with no appreciation (e.g., savings bonds), don’t benefit from a stepped-up basis. Additionally, income generated by assets before death (e.g., dividends or rent) may still be taxable.
Estate Tax Interaction: The stepped-up basis doesn’t eliminate federal or state estate taxes, which apply to estates above certain thresholds ($13.61 million per individual in 2025). However, Arizona does not have a state estate tax, which is advantageous for Phoenix residents.
Strategic Estate Planning with Cool Wealth ManagementAt Cool Wealth Management, we emphasize proactive estate planning to maximize the benefits of the capital gains reset. Here are some strategies we recommend:
Hold Appreciated Assets: If you own highly appreciated assets, holding them until death can erase significant capital gains taxes for your heirs. Our advisors can help you weigh this against other financial goals.
Leverage Community Property: For Arizona residents, structuring assets as community property can enhance tax savings. We can review your asset ownership to ensure optimal classification.
Use Trusts Wisely: Certain trusts, like revocable living trusts, preserve the stepped-up basis, while others, like irrevocable trusts, may not. We’ll help you choose the right trust for your goals.
Plan for Liquidity: While the stepped-up basis reduces capital gains taxes, estates may still face liquidity needs for expenses like probate or federal estate taxes. We can design strategies, such as life insurance, to cover these costs.
Why Work with Cool Wealth Management?
Navigating the complexities of the capital gains reset and estate planning requires expertise. At Cool Wealth Management in Phoenix, Arizona, our experienced financial advisors tailor strategies to your unique situation. Whether you’re planning for retirement, protecting your legacy, or minimizing taxes for your heirs, we provide personalized guidance to achieve your goals. Our deep understanding of Arizona’s tax laws, including community property rules, ensures you maximize every available advantage.
Take the Next Step
The capital gains reset at death is a powerful tool, but it’s just one piece of a comprehensive estate plan. Contact Cool Wealth Management today to schedule a consultation with our Phoenix-based advisors. We’ll help you structure your estate to minimize taxes, preserve wealth, and secure your family’s future.
