What does a step-up in tax basis allow GPs to do?

A step-up in tax basis primarily allows General Partners (GPs) to only pay taxes on incremental gains upon the future sale of an asset. This is particularly advantageous in private equity and real estate contexts, where assets may appreciate significantly over time. When a step-up in basis occurs, it effectively resets the value of the asset for tax purposes to its current market value. This means that if the asset is later sold, taxes will only be applicable on the gains made after the step-up, rather than on the entire appreciation from the original purchase price. This can significantly reduce the tax burden associated with the sale of an asset, benefiting the GPs and potentially part of their partnership agreements.

This is why the answer correctly highlights that GPs realize advantages in tax treatment specifically related to incremental gains, which is a crucial aspect when planning exits or sales in private equity transactions. It enhances the after-tax returns of GPs by deferring tax obligations until an actual sale generates a taxable event, allowing them to maximize their returns on investments.