Step-up in basis

Definition

Step-up in basis in real estate is a tax rule that resets the cost basis of an inherited property to its fair market value (FMV) on the date of the original owner's death. In plain terms, heirs inherit the property at its value when the owner died, not the price the owner originally paid—often dramatically reducing capital gains tax when the property is later sold.

How step-up in basis works with real estate and other assets

• At death the IRS generally assigns the inherited asset a new cost basis equal to its FMV at the decedent’s date of death (or an alternate valuation date in some estates), rather than the decedent’s original purchase price.
• If the heir sells the asset shortly after inheriting it, capital gains tax applies only to any appreciation that occurs after the date of inheritance.
• Example: a home bought decades ago for $50,000 is worth $750,000 at the owner’s death. The heir’s stepped-up basis is $750,000. If sold immediately for $760,000, the taxable gain is $10,000, not $710,000.

Real-world examples

1. Parent-to-child home inheritance — A mother bought a home in 1975 for $50,000. By 2023 it’s worth $750,000. Her daughter inherits with a stepped-up basis of $750,000 and, upon a quick sale for $760,000, pays tax only on the $10,000 gain.
2. Stock inheritance — Someone bought 1,000 shares at $10 each ($10,000). At death the shares are $100 each ($100,000). The heir’s new basis is $100 per share; selling immediately avoids paying tax on the original $10 basis per share.
3. Spousal/community property situation — In many community property states the deceased spouse’s half of community assets receives a step-up to market value, which can step up the entire asset and substantially reduce the surviving spouse’s future capital gains exposure.

What assets qualify?

Common assets that typically receive a step-up in basis:

• Real estate
• Stocks, bonds, and mutual funds (outside tax-deferred retirement accounts)
• Closely held businesses and partnership interests (subject to valuation rules)
• Collectibles and personal property, in some cases

Assets that generally do not receive a step-up:

• Tax-deferred retirement accounts such as IRAs and 401(k)s (distributions remain taxable)
• Annuities and certain contract-based accounts
• Assets gifted during the owner’s lifetime (these usually carry the donor’s original basis)

Why it matters for estate planning

• Big tax savings: Step-up can eliminate decades of unrealized appreciation from capital gains taxation, which is especially valuable for long-held real estate or securities.
• Gift vs. bequest decisions: Gifting appreciated property during life transfers the original basis to the recipient, often increasing future capital gains tax. Leaving property at death typically grants the step-up.
• Spousal and state rules: State law (like community property rules) and the form of ownership (joint tenancy, life estate, etc.) affect whether a step-up applies to all or part of an asset.
• Valuation and documentation: Accurate valuations at death and clear estate records are essential to support the stepped-up basis when heirs sell the property.

Practical tips

• Consider whether you want heirs to receive a stepped-up basis before gifting appreciated assets during your lifetime.
• If an heir plans to sell, selling soon after inheriting often minimizes taxable gain because the FMV at death becomes the new basis.
• Keep documentation of valuations, appraisals, and the decedent’s date-of-death value to support basis calculations.

Related terms

See also cost basis and capital gains tax.

Summary

The step-up in basis rule resets the inherited asset’s cost basis to its fair market value at the decedent’s death. It’s a powerful tax benefit for heirs, often eliminating capital gains tax on appreciation that occurred during the decedent’s lifetime. Understanding how it applies to real estate, securities, and business interests is an important part of estate planning and can influence whether assets are gifted during life or left at death.