Step-Up in Basis: How Inherited Assets Reduce Your Tax Bill

7 min read · Updated June 13, 2026

The step-up in basis is one of the most valuable — and least publicized — tax benefits in the U.S. tax code. It allows heirs to inherit appreciated assets without paying capital gains tax on decades of growth. For families with highly appreciated real estate, stock portfolios, or business interests, it can be worth hundreds of thousands of dollars.

What “Basis” Means

Your cost basis in an asset is generally what you paid for it — the starting point for calculating capital gains when you sell.¹ If you paid $100,000 for a house and sell it for $400,000, your capital gain is $300,000. That gain is generally subject to capital gains tax.

Long-term capital gains rates for assets held more than one year are 0%, 15%, or 20%, depending on income.² High earners also owe the 3.8% Net Investment Income Tax (NIIT) on investment income including capital gains.³

How the Step-Up Works

Under Internal Revenue Code § 1014, the basis of property acquired from a decedent is generally its fair market value on the date of death.⁴ This is the “step-up” — the basis steps up from what the deceased paid to what the property is worth when they die.

Example: Your parent bought 1,000 shares of stock in 1985 for $10,000. Those shares are worth $500,000 when your parent dies. You inherit the shares. Your basis is $500,000 — not $10,000. If you sell immediately for $500,000, you owe zero capital gains tax. The $490,000 gain that accumulated over 40 years is never taxed.

This benefit is sometimes called the “angel of death loophole” by critics, as the same gain that would have been taxed heavily had it been realized during life is entirely eliminated at death.⁵

What Gets a Step-Up?

Qualifying assets include:⁶

• Stocks and bonds held in taxable accounts
• Real estate (primary home, investment property, vacation property)
• Business interests (sole proprietorships, LLC interests, S-corp shares)
• Collectibles (art, coins, antiques)
• Closely held company stock
• Partnership interests

Assets that do NOT get a step-up:

• Retirement accounts (IRAs, 401ks): These have never been taxed because contributions were pre-tax. Withdrawals are ordinary income, and there is no step-up.⁷ This is why leaving a Roth IRA (already post-tax) to heirs is generally superior to leaving a traditional IRA.
• Annuities: The gain inside a non-qualified annuity is ordinary income to the beneficiary.
• 529 plans: These pass to the beneficiary and retain their tax-advantaged status; no step-up needed.

Step-Down in Basis: When Assets Decline

The same rule applies when inherited assets are worth less than the decedent’s basis — the basis steps down to the lower fair market value. If your parent paid $500,000 for real estate that is worth $300,000 at death, your basis is $300,000 — not $500,000. You cannot take a capital loss for the pre-death decline in value.⁸

Alternate Valuation Date

Estates may elect to value assets six months after the date of death (the “alternate valuation date”) if doing so decreases both the gross estate value and the estate tax liability.⁹ This can affect the step-up basis available to heirs if markets have declined between the date of death and six months later.

Community Property States: The Double Step-Up

In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), property acquired during a marriage is generally owned equally by both spouses as community property.¹⁰

Under IRC § 1014(b)(6), both halves of community property receive a step-up in basis at the first spouse’s death — even the surviving spouse’s half.¹¹

Example: A couple in California bought a home in 1990 for $200,000. As community property, each spouse has a $100,000 basis in their 50% share. The home is worth $1,000,000 when one spouse dies. Under the community property double step-up, both halves receive a new basis of $500,000. The surviving spouse’s basis in the entire home is now $1,000,000. If they sell for $1,000,000, zero capital gains tax is owed.

In a common-law (non-community property) state, the same couple holding the home as joint tenants would get a step-up only on the deceased spouse’s 50% share — the survivor’s basis stays at $100,000.

Inherited vs. Gifted Assets

The step-up in basis applies to inherited assets — it does not apply to assets given away during life. If you give appreciated stock to a child before your death, the child takes your carryover basis — what you paid.¹² If you die and the child inherits the same stock, they get the stepped-up basis.

This is a key consideration in planning: for highly appreciated assets you want to leave to children, holding them until death (so they inherit) may be significantly more tax-efficient than gifting them during your lifetime.

Exception: Be careful with giving appreciated assets to elderly parents in hopes of getting them back with a step-up. Assets given to someone who dies within one year and are inherited back by the original donor do not qualify for the step-up — Congress closed this loophole in the Tax Reform Act of 1976.¹³

Planning Strategies That Use the Step-Up

Hold, don’t sell, appreciated assets: If you own highly appreciated stock or real estate and your heirs will inherit it, there is a strong argument for holding rather than selling. The gain is eliminated at death; holding allows the step-up to work.

Hold low-basis assets in taxable accounts: For assets unlikely to be needed during your lifetime, a taxable brokerage account (not a retirement account) allows the step-up to work at death. IRAs never get a step-up.

Roth conversions for retirement accounts: Since retirement accounts don’t benefit from the step-up, accelerating income recognition (through Roth conversions) while capital gains rates are relatively low may benefit heirs who would otherwise face ordinary income rates on inherited traditional IRA distributions.¹⁴

Community property planning: Married couples in common-law states can elect community property treatment in limited circumstances — some states offer community property trust structures that allow non-community property states’ couples to achieve a full step-up.¹⁵

Stepped-up basis at death vs. gifts: For assets with large embedded gains, consider the beneficiary’s expected tax bracket. A child in the 0% capital gains bracket can inherit and immediately sell with zero tax; a child in the 20% bracket still pays less than the donor selling during life in many scenarios.

Proposed Changes to Watch

The step-up in basis has been a target of tax reformers for decades.¹⁶ President Biden proposed replacing the step-up with a “deemed realization” event at death in 2021, but the proposal was not enacted. Various proposals have circulated in Congress. The current law is in effect, but estate planners monitor legislative developments closely.

The Tax Cuts and Jobs Act (2017) roughly doubled the estate tax exemption, which is scheduled to sunset at the end of 2025 absent Congressional action, reverting to approximately $7 million per individual.¹⁷ This change could affect planning strategies for larger estates.

References

1. Internal Revenue Service, Publication 551, “Basis of Assets,” irs.gov/pub/irs-pdf/p551.pdf
2. Internal Revenue Service, “Topic No. 409 Capital Gains and Losses,” irs.gov/taxtopics/tc409
3. Internal Revenue Code § 1411, “Imposition of tax” (Net Investment Income Tax)
4. Internal Revenue Code § 1014(a), “Basis of property acquired from a decedent”
5. Joint Committee on Taxation, “Overview of the Federal Tax System,” jct.gov
6. Internal Revenue Service, Publication 551, “Inherited Property,” irs.gov/pub/irs-pdf/p551.pdf
7. Internal Revenue Service, Publication 590-B, “Distributions from Individual Retirement Arrangements,” irs.gov/pub/irs-pdf/p590b.pdf
8. Internal Revenue Code § 1014(a); Treasury Regulation § 1.1014-1
9. Internal Revenue Code § 2032, “Alternate valuation date”
10. Internal Revenue Service, “Community Property,” irs.gov/individuals/international-taxpayers/community-property
11. Internal Revenue Code § 1014(b)(6), “Property representing surviving spouse’s one-half share of community property”
12. Internal Revenue Code § 1015, “Basis of property acquired by gifts and transfers in trust”
13. Internal Revenue Code § 1014(e), “Appreciated property acquired by decedent within 1 year of death”
14. Internal Revenue Service, Publication 590-B; SECURE Act § 401 (10-year rule for inherited IRAs)
15. Uniform Disposition of Community Property Act (2010), adopted in a handful of states, uniformlaws.org
16. Tax Policy Center, “The Step-Up in Basis at Death,” taxpolicycenter.org
17. Tax Cuts and Jobs Act of 2017, Pub.L. 115-97; sunset provision under § 11061; Congressional Budget Office projections, cbo.gov

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