The term "basis" is what a person has paid for an asset and sometimes money invested in an asset after purchase (Example: what you paid for your house plus what you paid to update the kitchen). This determines gain/loss for income tax purposes.
There are generally two types of "basis":
- Stepped-up Basis - Assets get a new basis when they are passed by inheritance (through will or trust). These assets will be re-valued as of the date of death of the owner. If the value of the asset has gone up in value since purchase the new owner will take that asset with a new basis equal to the updated value without paying tax on that increase. This has the potential to save a significant amount of capital gains upon sale in the future.
- Stepped-down Basis - Same as the stepped-up basis except the asset has gone down in value since it was purchased. The new owner would then take that assets with a new reduced (stepped-down) basis. This depends on the value as of the date of death of the owner compared to the price the owner originally purchased the asset.
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