When most people think about a LLC, they think about liability protection, asset segregation, or business flexibility. But there is another major benefit that often gets overlooked — the potential for a step-up in basis at death.
And in many cases, this one tax concept can save families tens of thousands — or even millions — of dollars in capital gains taxes.
What Is a “Step-Up in Basis”?
“Basis” is generally what you paid for an asset.
If you bought:
• Real estate for $200,000
• Stock for $50,000
• A business interest for $100,000
…that purchase price usually becomes your tax basis.
Over time, assets may appreciate significantly. When an asset is sold, capital gains tax is generally calculated based on the difference between:
• the sale price, and
• the owner’s basis.
Example
A rental property purchased decades ago for $150,000 may now be worth $1.2 million.
If sold during life:
• Taxable gain = approximately $1,050,000
But if the owner dies still owning the asset, the basis may “step up” to fair market value at death.
That means:
• New basis = $1.2 million
• Immediate sale shortly after death could produce little or no capital gains tax.
That is an extraordinary tax benefit.
How Does a LLC Fit Into This?
Many families hold appreciating assets inside a Texas LLC for:
• rental properties,
• family ranches,
• mineral interests,
• investment portfolios,
• family businesses, or
• vacation properties.
When structured correctly, the LLC interest itself may receive a step-up in basis upon death.
This can create substantial tax advantages for heirs while preserving:
• centralized management,
• liability protection, and
• operational continuity.
Real Estate Example
Imagine Mom owns:
• a lake house,
• two rental properties, and
• a small commercial building
inside a single family LLC.
Original total cost basis:
• $600,000
Current value:
• $3 million
If Mom dies owning the LLC interest:
• the inherited LLC interest may receive a basis adjustment to current fair market value.
The family could potentially:
• sell assets with dramatically reduced capital gains,
• continue operating the properties with a refreshed depreciation schedule, or
• restructure ownership more efficiently.
But There Is a Catch…
Not every LLC automatically produces the tax result families expect.
Several factors matter, including:
• whether the LLC is taxed as a partnership or corporation,
• whether a §754 election is in place,
• community property rules,
• how the Company [Operating] Agreement is drafted,
• whether gifting occurred during lifetime,
• valuation discounts, and
• whether the asset is separate or community property.
This is where good legal and tax planning becomes essential.
Texas Community Property Advantage
Texas families may receive an additional advantage because Texas is a community property state.
For married couples:
• both halves of community property may receive a full basis adjustment at the death of the first spouse.
That can create enormous income tax savings for surviving spouses and children.
Example
Husband and Wife own a LLC holding appreciated real estate worth $4 million.
Combined basis:
• $700,000
At the first spouse’s death, the entire community property interest may receive a new basis of $4 million — not just the deceased spouse’s half.
That means:
• future taxable gain may be dramatically reduced.
What Is a §754 Election?
A §754 election is one of the most valuable — and most overlooked — tax elections for family LLCs taxed as partnerships.
This election may allow the LLC to:
• adjust the inside basis of assets after an owner’s death or transfer,
• create additional depreciation deductions, and
• avoid unfair tax burdens among family members.
Without proper planning, heirs can inherit assets with mismatched tax consequences.
Translation:
two beneficiaries may inherit equal ownership percentages but very unequal tax liabilities.
Common Mistakes Families Make
- Putting Everything Into One LLC
Combining:
• rentals,
• businesses,
• ranches,
• risky operations, and
• investment assets
into one entity can create legal and tax complications. - Forgetting the Company [Operating] Agreement
A generic Company Agreement often ignores:
• transfer provisions,
• valuation procedures,
• death provisions,
• tax allocations, and
• succession planning. - Gifting LLC Interests Too Early
Lifetime gifting may reduce estate taxes, but it can also sacrifice future basis step-up opportunities. Sometimes families save estate tax only to create larger capital gains problems later. - Ignoring Property Characterization
Improper titling can accidentally convert community property into separate property and reduce basis adjustment opportunities, or convert separate property into community property unintentionally.
LLCs Are Not “One-Size-Fits-All”
A LLC can be:
• a liability shield,
• an estate planning tool,
• a succession planning vehicle,
• a creditor protection strategy, and
• a powerful income tax planning structure.
But the details matter.
The way the LLC is:
• formed,
• funded,
• taxed,
• drafted, and
• integrated into the estate plan
can dramatically affect tax outcomes for the next generation.
Families often focus heavily on avoiding probate while overlooking one of the largest potential wealth destroyers: capital gains tax.
A properly structured LLC, coordinated with a thoughtful estate plan, may help:
• preserve family wealth,
• reduce future tax exposure,
• simplify succession, and
• maximize basis adjustment opportunities.
Sometimes the smartest estate planning strategy is not just about who inherits the asset…
…it is about what tax basis they inherit with it. For more information or if you have any questions about your LLC call our attorneys at Thrash, Carroll & Sanchez Law Group at 512-263-5400 or contact us at info@tcslawgroup.com.