If you sell capital assets, you have to pay capital gains taxes on the profit you make. The amount that is taxed is the difference between the cost basis, which is the amount you bought the asset for, and the amount you sold it for.
But there is a way to increase the cost basis before a sale.
According to a Business Insider report, some Americans have discovered this loophole and are making use of it. They’re taking advantage of Section 1014 of the Internal Revenue Code, also known as a step-up in basis. This technique can potentially save you thousands in taxes, but there are a few huge risks and downsides to be aware of.
If you’re a wealthy young American and you expect to make a substantial profit on the sale of assets like stocks or real estate, here’s how gifting those assets to your parents could help you save a fortune.
When you gift assets to your parents, you can usually do so without paying taxes on the transfer. You can make a tax-free gift as long as it’s valued below an annual limit, which is $19,000 per recipient in 2025. If you make a gift above this amount, it counts towards your lifetime gifts and estate taxes exclusion, which is $13.99 million in 2025 but is set to drop to 2017 levels, adjusted for inflation, in 2026.
After gifting the property to your parents, you can inherit the assets back when your parents die. If the parents die a year after the initial transfer, the step-up in basis comes in. Although the rules can be a little complicated, the basic gist is that when someone dies and leaves assets to heirs, the “cost basis” readjusts to the fair market value on the date of the death.
So, if you gave stock worth $36,000 to your mom and dad today, you could transfer it tax-free by giving them each $18,000. Say the stock went up in value and was worth $336,000 by the time your second parent died in 20 years, the “cost basis” would reset to $336,000. If you sold the stock for $340,000 at that time, you’d only have to pay capital gains taxes on $4,000. Estate taxes would only be a concern if their estate crosses the threshold.
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