Stepped-Up Basis
Definition
When inherited assets receive a new cost basis equal to their fair market value at the time of the decedent's death, eliminating capital gains tax on appreciation during the decedent's lifetime.
Stepped-up basis is one of the most significant tax benefits in the US tax code. When you inherit an asset, your cost basis is "stepped up" to its fair market value at the date of death, rather than the original purchase price. This means all the appreciation during the decedent's lifetime is never taxed as capital gains.
For example, if your parent bought stock for $10,000 that's worth $500,000 at their death, your basis is $500,000. If you sell immediately, you owe zero capital gains tax. If your parent had sold before death, they would have owed tax on $490,000 in gains. The stepped-up basis effectively erases decades of unrealized gains.
This rule profoundly affects estate and tax planning strategies. The "buy, borrow, die" strategy leveraged by wealthy individuals works because: buy appreciating assets (never triggering gains), borrow against them for spending money (loans aren't taxable income), and at death, heirs receive stepped-up basis, eliminating the deferred capital gains.
Stepped-up basis applies to most inherited assets: stocks, bonds, real estate, and collectibles. It applies to assets held in revocable trusts and those passed by will. It does not apply to assets in traditional IRAs or 401(k)s (which are taxed as ordinary income when withdrawn by heirs) or to assets gifted during the owner's lifetime (which carry over the original basis).
For inherited real estate, the stepped-up basis eliminates depreciation recapture and resets the depreciation clock. An inherited rental property valued at $400,000 starts fresh — the heir can depreciate the full $400,000 building value over 27.5 years, even if the decedent had already fully depreciated the original cost.
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Frequently Asked Questions
Does stepped-up basis apply to everything I inherit?
It applies to most capital assets: stocks, real estate, collectibles, and business assets. It does NOT apply to tax-deferred accounts (401k, IRA — these are taxed as ordinary income), gifts given before death (these keep the original basis), or assets in some irrevocable trusts. Check with a tax professional for specific situations.
Will stepped-up basis be eliminated?
Multiple administrations have proposed eliminating or limiting stepped-up basis, but none have succeeded. It's politically difficult to change because it affects family farms and small businesses, not just the wealthy. Current planning should use stepped-up basis while it exists but prepare for potential future changes.