Understanding the Step-Up in Basis When Inheriting Assets

To understand the step-up rule, let’s start with some basics.

What Is “Basis”?

A person’s basis in an asset is typically what they paid for it, adjusted over time for things like improvements, depreciation, or returns of capital. When that asset is sold, capital gain or loss is calculated as the difference between the sale price and the basis.

How the Step-Up in Basis Works

When someone passes away, most capital assets — such as stocks, real estate, business interests, collectibles, and cryptocurrencies — are stepped up (or down) to their fair market value (FMV) as of the date of death. Alternatively, the estate may choose to use an “alternate valuation date” — six months after the date of death — if it results in a lower estate tax.

This step-up resets the asset’s basis to its current value, effectively erasing any unrealized gains or losses that occurred during the decedent’s lifetime.

Example:

Let’s say your father purchased stock for $50,000. At the time of his death, it’s worth $220,000. When you inherit the stock, your new basis is $220,000. If you sell it for that amount, there’s no capital gains tax. If you hold onto it and later sell it for $260,000, you’ll only owe taxes on the $40,000 gain that occurred after his death.

Note: Not all assets qualify for a step-up in basis. Retirement accounts like 401(k)s and IRAs typically do not receive this treatment.

What Heirs Should Do

If you’ve inherited assets, here are a few important actions to take:

• Document the Fair Market Value at the date of death. Use statements from brokers, real estate appraisals, Zillow screenshots, cryptocurrency exchange records, etc.

• Retitle inherited assets into your name or trust promptly to prevent future administrative headaches.

• Maintain detailed records in case you sell the asset years later or the IRS asks for documentation.

Planning Ahead as an Asset Owner

If you’re organizing your estate, consider these steps to maximize tax efficiency for your heirs:

• Identify low-basis assets that you plan to keep in your estate to benefit from a step-up.

• Harvest capital losses strategically to offset gains that won’t be eliminated by the step-up.

• Be mindful when making gifts. Gifts come with a carry-over basis — meaning the recipient assumes your original basis, which could create a higher tax burden when they sell.

A Note on Special Situations

There are other rules and exceptions to consider. For instance, executors may choose an alternate valuation date, and gifts made shortly before death — often called “deathbed gifts” — might still be included in the estate for tax purposes.

Final Thoughts

The step-up in basis is a powerful tool for reducing capital gains tax, but it requires careful documentation and planning. Whether you're managing an inheritance or preparing your own estate, professional tax guidance can help you make informed decisions.

Need assistance? We’re here to help you navigate these rules and develop a strategy that makes the most sense for your situation.