As shown here on the right, Tom sells the house for the same $150,000. But because he received the house as an inheritance after Bob died instead of as a gift while Bob was living, the property receives a new stepped-up basis. The basis is now the value as of the date of Bob's death–$150,000.
So now when Tom sells the house, there is no gain on the sale–and no capital gains tax to pay. By not giving the house to him while he was alive, Bob would save Tom $26,000 in capital gains taxes.
Now, if your estate is larger and you can afford to give away an asset, gifting can be a great way to reduce estate taxes. We'll discuss estate taxes later on.
