Stepped-Up Basis Definition and Meaning

When you inherit an asset, its cost basis resets to its market value at the date of death—wiping out capital gains tax on all the appreciation that happened during the prior owner's lifetime.

This is one of the biggest tax breaks in the entire US tax code. When someone passes away and you inherit their investments, your cost basis isn't what they originally paid—it "steps up" to the asset's fair market value on the date of death. All the growth that happened during their lifetime? Never taxed as capital gains.

Here's a concrete example. Your parent bought stock for $10,000 decades ago and it's worth $500,000 when they pass. Your basis is $500,000. Sell the next day and you owe zero capital gains tax on the $490,000 in appreciation. If your parent had sold before death, they'd have owed tax on every dollar of that gain.

This rule is at the heart of the "buy, borrow, die" strategy some wealthy families use: buy appreciating assets (never triggering gains), borrow against them for spending money (loans aren't income), and at death the heirs get a stepped-up basis that erases the deferred gains.

Stepped-up basis covers most inherited assets—stocks, bonds, real estate, collectibles, and assets in revocable trusts. It does not apply to traditional IRAs or 401(k)s (those are taxed as ordinary income when heirs withdraw), or to assets gifted during the owner's lifetime (gifts carry over the original basis).

For inherited real estate, the step-up also wipes out any depreciation recapture and resets the depreciation clock. An inherited rental property valued at $400,000 can be depreciated fresh over 27.5 years—even if the original owner had already written off the full cost.

Frequently Asked Questions

▸Does stepped-up basis apply to everything I inherit?

Most capital assets, yes—stocks, real estate, collectibles, business assets. But NOT tax-deferred accounts like 401(k)s and IRAs (taxed as ordinary income), NOT gifts given before death (those keep the original basis), and not assets in certain irrevocable trusts. When in doubt, check with a tax professional.

▸Will stepped-up basis be eliminated?

Several administrations have tried to limit or remove it, but none have succeeded—partly because it affects family farms and small businesses, not just the ultra-wealthy. Plan around it while it exists, but keep an eye on proposals for potential changes.