What is Step-Up in Basis
Step-up in basis resets the cost basis of inherited assets to the fair market value at the date of the previous owner's death — potentially wiping out years of capital gains that were never taxed, with no tax owed by the heirs on that appreciation.
Step-up in basis is an IRS rule that resets the cost basis of an inherited asset to the asset's fair market value on the date of the decedent's death. This effectively eliminates the capital gains tax on any appreciation that occurred during the deceased's lifetime — heirs receive a fresh basis equal to current market value and only owe tax on gains that accumulate after they inherit.
The step-up is one of the most powerful wealth transfer benefits in the U.S. tax code and a cornerstone of estate planning strategies for wealthy families.
Why Step-Up in Basis Matters
Without the step-up: If your grandmother bought stock for $10,000 that grew to $200,000 by the time she died, and left the stock to you, you'd owe capital gains tax on $190,000 of gains when you sold — even though part of that gain is no longer "real" from your perspective.
With the step-up: Your basis is reset to the $200,000 fair market value at death. If you sell immediately, you owe zero capital gains tax. If you hold the stock and sell it later for $220,000, you owe tax only on the new $20,000 gain.
This is a massive benefit — potentially hundreds of thousands of dollars in deferred gains that are simply forgiven at the owner's death.
How Step-Up in Basis Works in Practice
For stocks and investment accounts: The basis of each position is reset to the closing price on the date of death. Your estate's custodian or broker will update the cost basis in the account records.
For real estate: The property's basis is reset to fair market value at death, which may require an appraisal. For rental property, this also resets the depreciation clock — you can start depreciating the property again from the stepped-up value.
For community property: In community property states (California, Texas, Arizona, and others), a surviving spouse may receive a full step-up on the entire community property asset (both halves), not just the deceased spouse's half — an even larger benefit.
Partial Step-Down in Basis
The step-up also works in reverse for assets that have lost value. If grandma's stock was worth $10,000 when she bought it and had declined to $6,000 at her death, the heir inherits a basis of $6,000 — a step-down — and cannot claim the $4,000 pre-death loss.
Step-Up vs. Carryover Basis (Gifts)
The step-up in basis is a death-time rule. When property is transferred as a gift during life, the recipient receives carryover basis — the original cost basis of the giver, including any embedded gains. The gift tax treatment of the same asset is therefore very different depending on whether it's transferred before or after death.
| Transfer Method | Recipient's Basis |
|---|---|
| Inherited at death | Fair market value on date of death (stepped-up) |
| Gifted during life | Original cost basis of giver (carryover) |
This asymmetry means that for highly appreciated assets, it's often better to hold and pass through your estate rather than gifting — the step-up eliminates the embedded gains entirely.
Planning Implications
Hold for the step-up: Highly appreciated assets with a low cost basis are often held until death rather than sold during life — the potential capital gains tax never needs to be paid.
Don't put low basis assets in a Roth IRA: Assets in a Roth IRA don't receive a step-up in basis at death because they're not included in the taxable estate in the traditional cost basis sense.
Consider the estate tax interaction: The step-up is available even if the estate owes no estate tax — it applies to any inherited property regardless of estate size. However, if Congress ever limits or eliminates the step-up as part of tax reform, the planning calculus would change significantly.