Step-up in basis
Also called Stepped-up basis
A tax rule that resets the cost basis of inherited assets to their value at the owner’s death, erasing capital gains built up during the owner’s life.
What it means
Under current federal law, when someone inherits a stock, fund, home or other capital asset, their cost basis generally becomes its fair market value on the date of the original owner’s death rather than what the owner paid. If the heir sells, only growth after that date is taxable, and the gain is treated as long-term regardless of how long the heir held it. If the asset lost value, the basis steps down instead.
The rule does not apply to traditional IRAs, 401(k)s and similar pre-tax accounts, where heirs owe income tax on withdrawals. Assets given away during life generally keep the giver’s original basis. For married couples, jointly owned property typically gets a step-up on the deceased spouse’s half, while in community property states both halves of community property can be stepped up at the first spouse’s death.
Example
Suppose a parent bought shares for $20,000 that are worth $100,000 when they die. The child inherits them with a $100,000 basis and later sells for $105,000, owing tax on just a $5,000 gain; the $80,000 of growth during the parent’s life is never taxed.
How it’s used
- Deciding whether to sell or hold appreciated assets late in life
- Calculating taxes after selling an inherited home or stock
- Comparing gifting assets now versus leaving them at death
Good to know
- Getting a date-of-death valuation or appraisal for inherited property makes the new basis easier to document later.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.