When it comes to estate planning, most people think about wills, trusts, and how to divide their property among loved ones. What many overlook is how capital gains tax can impact the value of the assets they pass on. If not planned for correctly, capital gains taxes can significantly reduce the inheritance your beneficiaries receive.
At Gieg & Jancula, we help Altoona families build smart estate plans that protect both assets and heirs. In this blog, we’ll explain how capital gains tax works, how it applies to your estate, and what Pennsylvania residents can do to minimize its impact.
What Is Capital Gains Tax?
Capital gains tax is a federal tax on the profit from the sale of certain types of assets, such as real estate, stocks, or investment properties. If you bought a home for $100,000 and later sold it for $200,000, the $100,000 profit would be considered a capital gain and subject to tax.
There are two types of capital gains:
- Short-term capital gains (for assets held less than one year): Taxed at your ordinary income rate
- Long-term capital gains (for assets held over one year): Taxed at a lower rate, generally 0%, 15%, or 20%, depending on income
When someone passes away, their estate may be subject to capital gains tax if heirs sell inherited assets for more than the adjusted value.
Step-Up in Basis: A Key Concept in Estate Planning
One of the most important rules in estate planning related to capital gains tax is the step-up in basis. This rule adjusts the original purchase price (the basis) of an asset to its fair market value at the time of the owner’s death.
Example:
- John buys a home in Altoona for $100,000.
- When he dies, the home is worth $250,000.
- His daughter inherits the home and later sells it for $260,000.
Because of the step-up in basis, her capital gain is only $10,000 ($260,000 sale price – $250,000 stepped-up basis), not $160,000. This significantly reduces or even eliminates the capital gains tax liability.
To fully understand how this may apply to real estate or inherited property, it’s helpful to consult with an estate planning attorney. Learn more about our real estate legal services.
How Capital Gains Tax Affects Estates in Pennsylvania
While Pennsylvania does not have a state-level capital gains tax, residents are still subject to federal capital gains tax on the sale of inherited assets.
Assets most commonly affected include:
- Homes and other real estate
- Investment portfolios (stocks, bonds, mutual funds)
- Business interests
- Collectibles and high-value personal property
If these assets are sold after death, the capital gain is calculated based on the stepped-up basis. However, if you gift the asset during your lifetime, the recipient inherits your original basis, which can lead to a much higher tax bill later.
This is why giving property to children before your death is not always the most tax-efficient strategy. We explore these issues further on our wills and trusts page.
Avoiding Capital Gains Tax with Trusts and Smart Planning
An effective estate plan can minimize or eliminate capital gains tax for your beneficiaries. Strategies may include:
1. Revocable Living Trusts
These allow you to manage your assets during life and pass them on after death while preserving the step-up in basis. Property transferred through a revocable trust still receives the step-up, helping heirs avoid large tax bills.
2. Irrevocable Trusts
These can remove assets from your taxable estate but may complicate the step-up in basis if not structured carefully. Proper legal advice is essential when using these tools.
3. Holding Appreciated Assets Until Death
Rather than gifting appreciated assets during your lifetime, it may be more tax-efficient to hold them and let beneficiaries inherit them at the stepped-up value.
4. Gifting Assets with Minimal Appreciation
If you want to give during your lifetime, consider gifting assets that haven’t appreciated much in value to avoid transferring large capital gain liabilities.
To ensure you are using the best approach for your specific goals, we recommend speaking with our estate planning attorneys in Altoona.
Capital Gains Tax vs. Inheritance Tax in Pennsylvania
Pennsylvania does not impose its own capital gains tax, but it does have an inheritance tax, which is separate.
Pennsylvania Inheritance Tax Rates:
- 0% for spouses or minor children
- 4.5% for direct descendants (children, grandchildren)
- 12% for siblings
- 15% for other heirs
These taxes apply to the value of the asset, not the gain. For example, if your child inherits a $300,000 home, they may owe 4.5% on that value, regardless of how much the home appreciated.
To learn more about estate administration, visit our probate services page.
Mistakes to Avoid When Planning Around Capital Gains Tax
At Gieg & Jancula, we often help clients avoid costly mistakes like:
- Gifting appreciated assets without considering tax consequences
- Failing to update their estate plan after a major life event
- Assuming that trusts automatically avoid taxes
- Selling inherited property too soon without understanding the basis
If you have questions about what your heirs will owe—or how to reduce that amount—reach out to us. Planning ahead is always better than trying to fix a problem after the fact. Our firm also helps clients with issues such as Medicaid planning to protect long-term care assets.
Capital Gains and Estate Planning for Business Owners
Business interests passed down through an estate may also be subject to capital gains tax if sold after death. If you own a closely held business in Pennsylvania, proper planning is essential.
Strategies to consider:
- Business succession plans
- Buy-sell agreements
- Gifting non-appreciated shares during life
- Structuring business ownership through trusts
Many business owners do not realize the tax consequences their heirs might face. Let our experienced estate planning team help you create a plan that protects your legacy. We also assist in other legal matters including contracts related to business succession.
What Should You Do Next?
If you are concerned about how capital gains tax might affect your estate or your children’s inheritance, take action now. Here’s what we recommend:
- Schedule a consultation with a qualified estate planning attorney
- Review your current assets and how they are titled
- Avoid gifting highly appreciated property without legal advice
- Update your will and trust documents regularly
- Educate your beneficiaries about potential tax obligations
Estate planning is not only about who gets what. It is about making sure your loved ones are not left with unexpected tax burdens. We invite you to contact our team today for a comprehensive review of your estate plan.
If you are also navigating personal injury settlements or other financial matters, we encourage you to explore our services for rear-end accident victims, as certain settlements can also affect estate value.
Speak with an Altoona Estate Planning Lawyer Today
At Gieg & Jancula, we specialize in helping families across Altoona and central Pennsylvania protect their assets through customized estate plans. From capital gains tax strategies to trust formation, our attorneys work to ensure that your legacy is preserved—and that your beneficiaries receive the full benefit of your hard work.
Call us today at 814-946-1606 or contact us online to schedule your free consultation. Let us help you reduce tax exposure and build a plan that reflects your wishes with confidence and clarity.