In Spring 2025, I sold one of my properties and successfully excluded $500,000 in capital gains, tax-free, thanks to the IRS Section 121 Exclusion. For those unfamiliar, this powerful rule allows homeowners to exclude up to $250,000 in capital gains if single, or $500,000 if married filing jointly, from the sale of a primary residence—as long as they meet the ownership and use tests.

Now it’s August 2025, and I’ve just been notified by my tenant that they’re vacating one of my rental properties at the end of their lease next month.

Given the San Francisco real estate market remains relatively strong, I’m now faced with a choice: Do I sell the property and take advantage of favorable pricing? Or do I hold onto it, boost my semi-passive income, knowing that if I wait until 2027, I could potentially exclude another $500,000 in capital gains—tax-free?

Let’s walk through how the exclusion works, how often you can use it, and why understanding this rule could save you six figures in taxes.

What Is the Section 121 Exclusion?

Under Section 121 of the IRS code, you can exclude up to $250,000 in capital gains ($500,000 if married filing jointly) from the sale of your primary residence, as long as:

1. You’ve owned the property for at least two out of the last five years, and
2. You’ve lived in the property as your primary residence for at least two out of the last five years.

You can only use this exclusion once every two years. If you sell another home within two years of your last excluded gain, you cannot claim the exclusion again.

This rule doesn’t just apply to homes you’ve always lived in. It can also be used on properties that were previously rented out, if you meet the timing requirements.

Why This Matters: My February 2025 Sale

In February 2025, I sold a home I had lived in from 2020 to late 2023. I moved out and rented it for 12 months before prepping and selling. Because I had lived in it for at least two of the past five years before the sale, I qualified for the full $500,000 exclusion.

Let’s say I bought the home for $1,000,000 and sold it for $1,800,000.

• Total capital gain: $800,000
• Section 121 exclusion: $500,000
• Depreciation recapture: $10,000 (taxed at 25%)
• Remaining long-term capital gain: $300,000

The $10,000 of depreciation recapture is not covered by the exclusion and will be taxed at up to 25%, or $2,500. The remaining $300,000 in capital gains will be taxed at long-term capital gains rates (typically 15%–20%, plus state taxes and possibly the 3.8% NIIT). We’re talking up to 33.8% in capital gains tax here in California!

Assuming I did zero remodeling, my total taxable gain is $315,000, split between depreciation recapture and regular LTCG. That’s a painful ~$104,000 in long-term capital gains taxes.

Still, I saved $150,000+ in taxes by taking advantage of the exclusion. To be specific: $500,000 X 33.8% = $169,000 in taxes I would have to pay if there was no exclusion!

The New Opportunity: Rental Property Tenant Gave Notice

Fast forward to today. A tenant in one of my other rental properties just gave notice. They’ve been there since January 2020, and I haven’t lived in the property since. Let’s say I bought the house in 2012 for $700,000 and is now worth $1.5 million.

If I sell it now, my capital gains would look something like this:

• Sale price: $1,500,000
• Original cost basis: $700,000
• Improvements over the years: $50,000
• Adjusted cost basis: $750,000
• Depreciation taken over rental period (5 years): $100,000
• Adjusted basis after depreciation: $650,000 ($750,000 cost basis minus depreciation)
• Capital gain: $1,500,000 – $650,000 = $850,000
• Depreciation recapture (taxed at 25%): $100,000 = $25,000
• Selling commission and transfer taxes: $80,000
• Remaining gain: $670,000 (taxed at long-term cap gains rate)

Because I haven’t lived in the property for two of the past five years, I cannot take the Section 121 exclusion—at least not yet.

But what if I leave my current ideal home for raising a family and move back in to this rental, which I called home from 2014-2019?

Moving Back In: The Two-Out-of-Five-Year Rule

To qualify for the exclusion again, I need to:

• Wait at least two years from my last use of the exclusion (February 2025 → February 2027), and
• Live in the property as my primary residence for at least two years within the five-year window before selling.

So, here’s a possible game plan:

1. September 2025: Tenant leaves. I move back in and make it my primary residence.
2. February 2027: I become eligible to use the exclusion again, two years after the February 2025 sale of another home.
3. September 2027: After two full years of living there, I meet the two-out-of-five-year use requirement again.
4. Fall 2027: I sell and exclude $500,000 in gains—tax-free.

Let’s look at the revised tax math.

Selling in 2027 (Two Years Later) With Exclusion

• Sale price: $1,550,000 (assuming modest $50,000 appreciation)
• Adjusted basis: $650,000 ($750,000 cost basis minus $100,000 depreciation)
• Capital gain: $900,000
• Section 121 Exclusion: $500,000
• Remaining gain: $400,000
• Depreciation recapture (unchanged): $100,000 taxed at 25% = $25,000
• Selling commission and transfer taxes: $80,000
• Remaining capital gains subject to LTCG tax: $220,000

That’s $500,000 in gains excluded, potentially saving up to $169,000 in federal and state taxes depending on my tax bracket. In this case, moving back in to unlock the tax free benefit before relocating to Honolulu feels like a financially prudent decision.

Another option is doing a 1031 exchange to defer all taxes by reinvesting the proceeds into a rental property in Honolulu. But the idea of taking on another rental and all the responsibilities that come with it feels less appealing these days.

Prorated Exclusion If I Sell Early

What if I decide to sell before September 2027—before hitting the full two-year residency again?

There’s a little-known rule that allows for a partial exclusion if you sell early due to an unforeseen circumstance, job change, health issue, or other qualified reason. But it’s tricky, and the IRS is strict about qualifying.

Partial Exclusion = (Months of ownership and use / 24) × $250,000 (or $500,000)

The safest move is to wait the full 24 months before selling.

Just know that you may also have to prorate the tax-free exclusion amount, depending on how long you rented the property after 2009 that aren’t qualifying years.

Example Of Pro-Rating The Tax-Free Exclusion

Let’s say:

• You bought a home in 2015.
• You lived in it as your primary residence for 6 years (2015-2021).
• Then you rented it out for 2 years (2021-2023).
• You sold it in 2023 with a $600,000 gain.
• You’re married filing jointly, so normally you’d qualify for the $500K exclusion.

But here’s the catch:

Because 2 of the 8 years of ownership (2019–2022) were non-qualified use, you must prorate the exclusion:

Non-qualified use ratio = 2 years / 8 years = 25%

So, 25% of the $600,000 gain = $150,000

This portion does NOT qualify for the exclusion.

That means only 80% of the gain ($480,000) is eligible for exclusion.

So your exclusion is limited to $480,000, not the full $500,000.

The remaining $20,000 will be taxable as long-term capital gain. Still, not bad!

Important note:

• Non-qualified use before the property was ever a primary residence does not count against you (e.g., if you rented it first, then lived in it, you’re OK).
• This rule only affects time after 2009.

Downsides and Considerations To Moving Back Into The Rental

Of course, there are tradeoffs to saving money on capital gains tax.

• I’ll have to live in the rental again, which is not ideal since it is smaller than my current residence with only one en suite bathroom
• The property won’t generate rental income during those two years.
• If the market weakens, I might give up gains or deal with less favorable selling conditions.
• Depreciation recapture never goes away, it will always be taxed.
• I’d have to rent out my existing house, keep it empty, or sell it, which would create the same problem. You can’t have two primary residences according to the IRS.
• Every time there is a property sale, there is economic waste in terms of fees, taxes, and commissions

As you can see, moving back into a rental to try and save on capital gains taxes isn’t always a straightforward decision. But even with these downsides, the $500,000 exclusion can more than make up for the short-term discomfort.

Strategy Summary Using The Tax-Free Home Sale Exclusion Rule

Here’s the big picture:

Action	Timing	Tax Benefit
Sold property A in Feb 2025	Met 2 of 5 rule	$500K gain excluded
Move into property B in Sept 2025	Start clock	Living requirement begins
Become eligible again in Feb 2027	2 years since last exclusion	Can exclude again
Sell property B in Sept 2027	Full 2 years of primary residence met	Exclude another $500K gain

By leapfrogging primary residences and planning around the two-year exclusion rule, it’s possible to exclude millions in gains over your lifetime.

Minimize Capital Gains Taxes Where You Can

The $500,000 tax free home sale exclusion is one of the most powerful tools in the tax code for building and preserving wealth. No other asset class offers this kind of benefit except for Qualified Small Business Stock, which comes with its own challenges. But like most good things, the exclusion requires patience, planning, and sometimes a little sacrifice.

If you have a rental with significant appreciation and flexibility in your living situation, it could be worth the effort to move back in for two years to reset the clock on the exclusion.

After all, saving $100,000 to $169,000 in taxes every two years is like earning an extra $50,000 to $84,500 a year completely tax free. Earning $500,000 in tax-free real estate gains is also like earning ~$750,000 in the stock market and paying no taxes. Not a bad strategy for those who like to optimize their finances.

Even Easier For Non-Rental Property Owners

Alternatively, if you are climbing the property ladder toward nicer homes, you can keep using the $250,000 or $500,000 capital gains exclusion with each sale. Sell four homes in your lifetime and you and your spouse could legally avoid taxes on up to two million dollars in capital gains. That equates to about $500,000 in tax savings. There’s no need to prorate the tax-free exclusion amount either since you did not rent out your homes.

Then when you finally find your forever home, your heirs benefit from a stepped up cost basis when you pass so they may avoid capital gains taxes as well. Pretty awesome tax benefits if you ask me.

Homeownership remains one of the most accessible ways for most people to build lasting wealth. Between forced savings through mortgage payments, inflation pushing up rents and home values, and the power of leverage, the average homeowner is far wealthier than the average renter. Yes, renters can invest the difference and potentially make more money, but statistically most do not consistently over time.

So if the government offers generous tax breaks to encourage homeownership, we might as well take full advantage. It is one of the few legal ways left to build wealth tax efficiently and potentially pass it on tax free.

Readers, anybody ever move back to a rental property and live in it for two years to take advantage of the tax-free home sale exclusion rule?

Diversify Into Passive Private Real Estate 

If you are tired of being a landlord, consider diversifying into private real estate instead. Fundrise is a platform that lets you invest 100 percent passively in residential and industrial properties across the country. With nearly $3 billion in real estate assets under management, Fundrise focuses on the Sunbelt region, where valuations are generally lower and yields tend to be higher.

No more dealing with tenants, maintenance issues, or turnover. Instead, you can gain exposure to a diversified portfolio of private real estate without the day to day hassle.

I have personally invested over $150,000 with Fundrise real estate. For new investors, you can get a $100 bonus if you invest over $10,000 and a $500 bonus if you invest over $25,000. They have been a trusted partner and long time sponsor of Financial Samurai. With just a $10 minimum investment, adding real estate to your portfolio has never been easier.

Imagine spending your life building wealth, investing in real estate, stocks, or your business, with the hope of leaving a legacy for your children. Then one day, you find yourself wondering: Will the government take a massive chunk of it anyway?

If your estate is well above the federal estate tax exemption threshold — $30 million for a married couple in 2026 under the OBBBA — you might be asking a very legitimate question:

“What’s the point of the step-up in basis if my estate still owes millions in estate taxes?”

Conversely, if your estate is well below the federal estate tax exemption threshold, you might also ask the far more common question:

“What’s the benefit of the step-up in basis if I won’t be paying the death tax anyway?”

Because I’m not dead yet, I haven’t been focused too much on the estate tax owed upon death. However, like any good pre-mortem planner who thinks in two timelines, it’s important to clarify the confusion and plan accordingly.

Let’s walk through how it all actually works. I’ll explain it with three examples, so you’ll come away understanding why the step-up in basis still matters and why estate tax planning becomes critical the wealthier you get.

The Basics: Step-Up in Basis vs Estate Tax

The key to understanding how the step-up in basis helps, regardless of your estate’s value is knowing there are two completely different taxes in play when someone dies:

1. Estate Tax – a tax on the total value of your assets at death, if your estate exceeds the federal exemption. This tax is paid by the estate.

2. Capital Gains Tax – a tax on the appreciation of assets, but only if those assets are sold. This tax is paid by your heirs.

When someone dies, their heirs get a step-up in cost basis on inherited assets. That means the asset’s cost basis is reset to the fair market value (FMV) on the date of death. The capital gains from the decedent’s lifetime are essentially wiped out.

If you’re looking for a financial reason to hold onto your stocks, real estate, and other assets indefinitely, the step-up in cost basis is a compelling one. Instead of selling your assets, do what billionaires do, and borrow against them to incur no capital gains tax liability.

I used to think it was wasteful for investors to never sell and enjoy a better life with the proceeds along the way. But it turns out, never selling might be the greatest gift you could leave your adult children.

Step-up In Basis vs Estate Tax Example 1: A $50 Million House

To help us better understand how the step-up in basis and the estate tax threshold works, I want to use an extreme example. Thinking in extremes helps you understand anything better.

Let’s say you and your spouse own a single house worth $50 million. You bought it decades ago for $1 million, and it’s now your primary residence. You both pass away, and your two children inherit the property.

Capital Gains Tax:

Normally, if your children sold that house with a $49 million gain, they’d owe capital gains tax — around 20% federal plus 3.8% net investment income tax. That’s over $11 million in taxes.

But because of the step-up in basis, the cost basis resets to $50 million. If they sell the house for $50 million the day after your death, they owe zero capital gains tax. Hooray for a tax-free generational wealth transfer—just for having the good fortune of being born to a rich bank of mom and dad!

Well, not quite.

Estate Tax:

Despite being dead, you’re not off the hook entirely. Because your estate is worth $50 million (you have no other assets but the $50 million house) and the federal estate tax exemption for a married couple is $27.98 million in 2025, the taxable estate is $22.02 million.

At a 40% tax rate, that’s a $8.8 million estate tax bill. Ouch.

And here’s the key point: the estate tax comes first. It has to be paid before the heirs get the property — and it’s paid out of the estate itself.

So the executor (perhaps your children) either:

• Have to sell part or all of the house to pay the estate tax, or
• Use other liquid assets in the estate (if any) or borrow against the house
• Borrow Against the Property (Estate Takes Out a Loan)
• Use Life Insurance (Irrevocable life insurance trusts)
• File a 6-month extension with the IRS and ask to pay in installments

If you know you have a large, illiquid estate, you must plan ahead to figure out how to pay the estate tax.

So What’s the Point of the Step-Up?

At first glance, this seems discouraging. You still owe tax, so what did the step-up even save you?

Here’s the thing: Without the step-up, the tax bill is much worse.

Imagine the same scenario, but there was no step-up in basis. The kids inherit your $50M house with a $1M cost basis. Now the total taxes owed are:

• Estate tax: $8.8 million

• Capital gains tax (if they sell): 23.8% of $49 million = ~$11.7 million

Total tax: $20.5 million

That’s 40% of the value of the estate gone to the government. With the step-up in basis, that total tax burden drops to just the $8.8 million estate tax from $20.5 million.

In other words, the step-up in cost basis prevents double taxation. It doesn’t make estate tax go away. But it shields your heirs from also having to pay capital gains tax on the same appreciated value.

Step-up In Basis vs Estate Tax Example 2: A $45 Million Stock Portfolio

Let’s say your net worth is mostly tied up in tech stocks you bought in the early 2000s. Maybe you got into Amazon at $50 a share or invested early in a basket of private AI companies. Now, your portfolio is worth $45 million, but your cost basis is only $2 million.

When you pass away:

• Your heirs receive the stock with a stepped-up basis of $45 million
• If they sell immediately, they owe no capital gains tax
• However, if your total estate (including other assets) exceeds the federal exemption, they’ll still face estate tax on the amount over the threshold

Let’s say your total estate is worth $45 million and you’re married. Assuming you’ve properly elected portability and the combined federal estate tax exemption at the time of death is $25 million, your taxable estate would be $20 million. At a 40% estate tax rate, the estate would owe approximately $8 million. This tax must be paid before distributions to your heirs, meaning they would receive roughly $37 million, not the full $45 million.

The good news is that the step-up in cost basis applies to the full $45 million, not just the $37 million your heirs actually receive after taxes. So if they sell the assets for $45 million, they’ll owe zero capital gains tax because their cost basis has been reset to the fair market value at the time of death.

Without the step-up, they would inherit your original cost basis of $2 million. If they sold the portfolio for $45 million, they’d owe capital gains tax on $43 million in unrealized gains. At the 23.8% federal long-term capital gains rate, that’s over $10 million in potential tax — on top of the $8 million in estate tax.

Step-Up in Basis Example 3: A $4 Million Rental Property

Let’s say you bought a rental property 30 years ago for $400,000. Over time, its value has appreciated to $4 million, and it’s now fully paid off. You have no mortgage, and your total estate—including this property, some retirement savings, and other assets—is worth $5 million.

Since the federal estate tax exemption for an individual is $13.99 million in 2025 (or $27.98 million for a married couple), your estate is well below the taxable threshold. That means no estate tax is due—your heirs get everything without the estate owing a penny to the IRS.

But here’s where the step-up in basis makes a massive difference:

Capital Gains Tax Without the Step-Up:

If you gifted the property to your child while alive, they’d inherit your original $400,000 basis, not the $4 million fair market value. If they later sold it for $4 million, they’d owe capital gains tax on $3.6 million of gains. That’s likely over $850,000 in taxes, depending on their income and state.

On the other hand, if you hold the property until your death, then your heirs get a step-up in basis to the fair market value on your date of death — in this case, $4 million. If they sell right away, no capital gains tax is due.

So ironically, doing nothing and holding onto the property until death is often the most tax-efficient strategy. So perhaps your boomer parents aren’t so greedy after all for not helping you more while alive.

Capital Gains Tax With the Step-Up:

But if you hold the property until death, the basis is stepped up to the $4 million fair market value. Your heirs can then sell it for $4 million the day after inheriting it and owe zero capital gains tax.

Who Pays What Tax?

• Estate tax is paid by the estate, if owed, before assets are distributed.
• Capital gains tax is only paid by the heirs if they sell the asset and only if there’s a gain beyond the stepped-up basis.

In this third example, because the estate is below the exemption limit and your heirs sell right after inheriting, neither the estate nor the heirs pay any tax. Hooray for not being rich enough to pay even more taxes!

The Step-Up Is A Gift — But It’s Not a Shield

Think of the step-up in basis as a forgiveness of capital gains tax, but not a full pardon from all taxes.

You’re still subject to the estate tax if your assets exceed the exemption. But the step-up can make a huge difference in the after-tax inheritance your children receive.

For high-net-worth families, the step-up is essential to prevent what could otherwise become a 60%+ combined tax burden.

Even if you don’t expect your estate to be large enough to trigger estate tax, the step-up in basis can still save your heirs hundreds of thousands to millions of dollars in capital gains taxes.

The step-up is one of the most powerful estate planning tools available — and a compelling reason to hold onto appreciated assets until death, especially if your goal is to maximize what you pass on.

Actions You Can Take To Reduce Your Estate Tax

If your estate is well above the federal exemption — especially if most of your wealth is tied up in a single asset like a business, property, or concentrated stock position — you need to plan ahead to pay the estate taxes. Some strategies include:

1. Grantor Retained Annuity Trust (GRAT)

Move appreciating assets out of your estate into trusts, like a Grantor Retained Annuity Trust (GRAT) or Intentionally Defective Grantor Trust (IDGT). These remove future appreciation from your taxable estate.

Example: Put $1M of rapidly appreciating assets (like stocks or real estate) into a short-term, 2-year GRAT. You get annuity payments back, and the future appreciation passes to heirs gift-tax free.

• Transfer $2M into a 2-year GRAT
• Receive $1M/year back in annuities
• Asset appreciates 8% annually
• After 2 years, excess growth goes to heirs estate-tax free

A Revocable Living Trust Doesn’t Reduce Your Taxes

For those wondering whether putting your assets in a revocable living trust can help you save on estate taxes or capital gains taxes — it doesn’t. A revocable living trust is primarily a tool for avoiding probate, maintaining privacy, and streamlining the distribution of your assets after death.

While it does ensure your heirs receive the step-up in basis on appreciated assets (since the trust is still considered part of your estate), it does not reduce your estate’s value for estate tax purposes. The IRS treats assets in a revocable trust as if you still own them outright.

In other words, the trust helps with logistics and efficiency — not with reducing your tax bill. If your goal is to lower your estate taxes, you’ll need to explore other strategies, such as lifetime gifting, irrevocable trusts, or charitable giving, which actually remove assets from your taxable estate.

2. Annual Gifting

You and your spouse can give up to $19,000 (2025) per person, per year to anyone without reducing your lifetime exemption. The annual gift limit tends to go up every year to account for inflation.

Example: you and your spouse have 2 children and 4 grandchildren. That’s 6 people × $19,000 × 2 spouses = $228,000/year.

Over 10 years:

• $228,000 × 10 = $2.28 million removed from your estate

• These gifts also shift appreciation out of your estate, compounding the benefit

If your estate is well below the estate tax exemption amount, annual gifting won’t make a difference for estate tax reduction purposes. You’ve just decided to help your children or others now, rather than after you’re dead.

Further, you’re free to give more than the gift tax limit a year if you wish. Technically, you’re supposed to file Form 709 if you do. However, I don’t think it matters if you’re way below the estate tax threshold.

3. Charitable Giving

Donating part of your estate to a charity can reduce your taxable estate and support causes you care about. Charitable remainder trusts can provide income for you and a benefit for your heirs, while reducing the tax burden.

Example: You set up a Donor Advised Fund and donate $100,000 a year to your children’s private school for 10 years. Not only do you help your school, you reduce your taxable estate by $1,000,000 and get a board seat. In turn, your children get a leg up in getting into the best high school and colleges.

4. Buy Life Insurance in an ILIT

Life insurance held inside an Irrevocable Life Insurance Trust (ILIT) can provide your heirs with liquidity to pay estate taxes — without the proceeds being taxed as part of your estate.

Example: Buy a $3 million life insurance policy inside an ILIT. The trust owns the policy and receives the payout tax-free when you die.

That $3 million death benefit can be used by your heirs to pay estate taxes, so they don’t have to sell assets.

Pro: Provides tax-free liquidity.

Con: You must give up control of the policy (but can fund premiums via gifting).

5. Charitable Remainder Trust (CRT)

Place appreciated assets into a CRT. You receive income for life, and when you die, the remainder goes to charity. You get a partial estate tax deduction now.

Example:

• Donate $5M appreciated stock
• You receive $200K/year income
• Get a charitable deduction today (~$1.5–2M)
• Avoid capital gains on sale of stock inside the trust
• Reduces taxable estate by $5M

Pro: Gives you income, avoids capital gains, helps charity

Con: Your heirs don’t receive the donated asset

6. Family Limited Partnership (FLP)

Put assets into an FLP and gift minority interests to family members. Because these interests lack control and marketability, the IRS allows you to discount their value by 20–35%.

Example:

• Move $20M into an FLP
• Gift 40% interest to heirs
• With a 30% discount, value is reported as $5.6M, not $8M
• Reduces reported estate value significantly

Pro: Keeps control while reducing taxable estate

Con: IRS scrutinizes discounts — must be done carefully

7. Relocate To A Lower Tax State Or Country

Finally, you may want to consider relocating to a state with no state estate or inheritance tax before you die. There are over 30 such states. If you can successfully establish residency, your estate—and ultimately your heirs—could save millions of dollars in taxes.

Now, if you’re a multi-millionaire thinking about moving to another country to avoid estate taxes, keep in mind: there’s no escaping the federal estate tax if your estate exceeds the exemption threshold. Even if you’ve lived abroad for decades, as long as you’re a U.S. citizen, your entire worldwide estate remains subject to U.S. federal estate tax upon your death.

However, if you officially renounce your U.S. citizenship, the rules change. You’ll no longer owe U.S. estate tax on non-U.S. assets—only on U.S.-situs assets like real estate and U.S. stocks. But there’s a catch: if your net worth exceeds $2 million, or if you can’t certify five years of U.S. tax compliance, you’ll be classified as a “covered expatriate” and may be subject to an exit tax under IRC Section 877A.

This exit tax treats all your worldwide assets as if they were sold the day before you renounce, taxing any unrealized gains above a certain exemption.

Final Thoughts: The Step-Up in Basis Helps A Lot

If your estate is under the federal exemption, the step-up in basis remains a powerful tool that lets your heirs inherit appreciated assets tax-free. By holding onto your wealth until death, your heirs receive a stepped-up cost basis and can avoid capital gains taxes if they sell. In contrast, if you gift appreciated assets during your lifetime, the recipient inherits your original cost basis, potentially triggering significant capital gains taxes upon sale.

Once your estate exceeds the exemption threshold, the federal estate tax kicks in. Without proper planning, your heirs may even be forced to sell valuable assets just to cover the tax bill. The step-up helps, but it’s not a substitute for a thoughtful estate plan. Strategies like GRATs, ILITs, and charitable trusts can dramatically reduce or even eliminate your estate tax liability, but only if you start planning early.

Also keep in mind: not all assets get a step-up in basis. Pre-tax retirement accounts like IRAs and 401(k)s don’t qualify. Instead, your heirs will owe ordinary income tax when they withdraw the money—not capital gains.

Your best move? Talk to an experienced estate planning attorney. We have, and it made a world of difference for our peace of mind. The step-up may save your heirs from one tax, but the IRS is still waiting with another.

Readers, are you now less upset about your wealthy parents holding onto their assets instead of gifting them to you while they’re still alive—thanks to the step-up in cost basis? 

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Diversify Your Retirement Investments

Stocks and bonds are classic staples for retirement investing. However, I also suggest diversifying into real estate. It is an investment that combines the income stability of bonds with greater upside potential.

Consider Fundrise, a platform that allows you to 100% passively invest in residential and industrial real estate. With over $3 billion in private real estate assets under management, Fundrise focuses on properties in the Sunbelt region, where valuations are lower, and yields tend to be higher. Residential commercial real estate is attract. Meanwhile, the Fed is set to cut rates further.

In addition, you can invest in Fundrise Venture if you want exposure to private AI companies like OpenAI, Anthropic, Anduril, and Databricks. AI is revolutionizing the labor market, eliminating jobs, and significantly boosting productivity. We’re still in the early stages of the AI revolution. I’m investing for my children’s futures.

I’ve personally invested over $400,000 with Fundrise, and they’ve been a trusted partner and long-time sponsor of Financial Samurai. With a $10 investment minimum, diversifying your portfolio has never been easier.

To increase your chances of achieving financial independence, join 60,000+ readers and subscribe to my free Financial Samurai newsletter here. Financial Samurai began in 2009 and is the leading independently-owned personal finance site today.