The Listen to Lawrence Letter: Follow up on COST/TAX BASIS

October 25, 2023
October 10, 2023 • Volume 4 Issue 180
A follow-up on our tax basis discussion from my LISTEN TO LAWRENCE LETTER, Volume 4, Issue 179.



Today’s letter confuses me.

If a house is in an Irrevocable Trust (you set it up), I thought that:

1) If the house is sold while the original owner is alive, then the cost basis is as you indicated.


2) If the house is sold after the original owner has passed away, the trust’s cost basis is the value at the time of the death of the original owner.

Am I wrong?

My house was bought for $30,000 in 1970. Let’s say I have put in $120,000 in capital improvements over the 50+ years. If the house is sold by the trust, while I am alive, the cost basis would be $150,000 and then there is the exemption, whatever that is.

If the house is sold by the trust, after I pass away, the cost basis would be the value now, approx $600,000.

Which is the correct answer?


We are both correct.  My letter addressed the basis and capital gains tax issues if the house was sold in the trust while you were still living. However, the tax basis gets “stepped up” to the value at the date of your death (or half stepped up at the date of the first spouse to die). In your case, upon your death, the new tax basis would be $600,000 if that is the value of your house on the day you pass. When the house is sold soon thereafter for $600,000, the capital gain would be zero.

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