Step-up in basis

A step-up in basis occurs when you inherit an asset. Instead of taking on the deceased owner’s cost basis, your new basis is the fair market value on the date of death. If a stock was worth $100 when purchased and $1,000 when inherited, your basis is reset to $1,000—erasing all embedded gains. You could sell immediately with zero capital gains tax. This is sometimes called the “step-up loophole” and is one of the largest tax advantages in US law.

How step-up works: an example

Suppose your parent bought Apple stock in 1990 for $100 per share (100 shares) and held it until their death in 2024, when it was worth $200 per share. The inherited holding has an embedded $10,000 gain ($100 per share × 100 shares).

Without step-up: If you inherited the basis, your cost basis would be $100. If you sold at $200, you would owe tax on a $10,000 gain.

With step-up: Your new basis is $200 (the fair market value at death). If you sell at $200, you have zero gain and zero tax. The entire $10,000 gain is forever erased.

This is one of the largest tax breaks in the US code.

Why step-up exists

The step-up is justified by the fact that estates are subject to federal estate tax—assets above an exemption threshold are taxed at up to 40%. Congress reasoned that asking heirs to also pay income tax on the same assets would be double taxation. The step-up is a concession to that concern.

However, the step-up applies to nearly all inherited assets, not just those in taxable estates. This creates a massive loophole: a wealthy person can hold appreciated assets their entire life, avoid income tax through the step-up on inheritance, and face estate tax only if their total estate exceeds the exemption (nearly $13 million in 2024). Many ultrawealthy never pay capital gains tax because they hold through death, stepping up to heirs, who again hold through their own deaths.

What receives step-up

Most inherited assets receive step-up:

• Stocks and bonds
• Real estate
• Mutual funds and ETFs
• Cryptocurrencies and collectibles
• Partnership interests (usually)

What does not receive step-up

A few asset types do not receive step-up:

Retirement accounts (IRAs, 401(k)s). Inherited IRAs retain their pre-tax basis. Heirs must withdraw and pay income tax on distributions.

Charitable remainder trusts. Retain original basis.

Certain foreign assets. Some foreign-held securities may not qualify.

S-corp and partnership interests. Rules are complex; consult a tax professional.

Step-down

Occasionally, an asset is worth less at death than when the decedent bought it. In this case, the step-up becomes a step-down: the basis is reduced, preserving the loss. This is less valuable to the heir (they wanted the loss to harvest) but still accurate.

Timing: date of death vs. alternate valuation date

Basis is normally set at the fair market value on the date of death. An exception (the alternate valuation date) allows estates to use fair market value six months after death. This can be advantageous if assets decline after death.

Potential legislative changes

The step-up has long been a target for tax reform. Proposals to eliminate or limit it have appeared in multiple administrations. Current law provides it to nearly all inheritors, but this could change. Discuss with an estate planning tax professional if you are planning large inheritances.

Strategic implications

Because of the step-up, holding appreciated assets until death is often tax-optimal for the owner, even if they have no other use for the asset. This can create portfolio distortions—an elderly investor might hold a concentrated, inefficient position in a single stock because the step-up will wipe out the gain.

See also