"Basis" is important in tax planning. "Basis" is a shorthand way of describing the amount of money you are entitled to recover free of income taxes if you sell something.
You buy 1,000 shares of stock in Row Boat Company, for $100,000. Few people can afford to buy fuel for outboard motors any more, so the demand for rowboats increases, and you sell your stock for $300,000. Your gain ($200,000) is determined by subtracting from the sale price of $300,000 your basis of $100,000.
If someone leaves you an inheritance, your basis in the assets "steps up" to the fair market value when they died, or the value six months later if an estate tax return was filed and the executor chose the alternate valuation date. The basis steps up even if no estate tax return was required or filed.
If the property is a lifetime gift, your basis is the donor's basis. Uncle Charlie gives you $200,000 of Buggy Whip Company stock he bought for $100 when the automobile made buggies obsolete. With gasoline costing $4.00 per gallon - much more than oats - buggy whips are going to be in demand again, and the price of the stock has risen.
Since this is a gift during Uncle Charlie's life, your basis is his basis - $100. When you sell the stock for $200,000, you have $199,900 of taxable gain.
If Uncle Charlie had left you the stock in his will, or it had been payable to you upon his death, you would have a "stepped-up" basis of $200,000. When you sold the stock for $200,000, you would have no taxable gain.
There are some special rules. For instance, in the case of spouses who created joint interests in property before 1977 the basis step-up may apply to all of the property, rather than one-half.
"Basis point" is a separate concept. A basis point is equivalent to 1/100th of a percent, and often refers to changes in interest rates and bond yields.
It is important to consider basis when doing tax planning. Remember that, even if someone had assets less than $1,000,000 (the Massachusetts filing threshold) so that no estate tax return was filed, you still are entitled to a stepped-up basis in inherited property.
We will be happy to work with you in your tax planning.
