What is Step-Up in Basis?
Step-up in basis is a US federal tax rule under Internal Revenue Code section 1014 that resets the cost basis of most inherited assets to fair market value on the date of the original owner's death. Heirs who sell immediately pay capital gains tax only on appreciation after the date of death, so decades of unrealized appreciation accumulated during the decedent's lifetime escape income tax entirely.
Detailed definition
Step-up in basis (IRC section 1014) is one of the single most powerful tax provisions in the US code. When a US taxpayer dies, the cost basis of property included in their gross estate is reset to fair market value on the date of death. This means decades, sometimes generations, of unrealized appreciation can pass to heirs free of federal capital gains tax. The Joint Committee on Taxation estimates the federal revenue loss from step-up exceeds $40 billion per year (JCT estimates 2023 to 2027).
The mechanics are simple. A taxpayer bought 100 shares of an S&P 500 ETF at $50 a share in 1995. By the time he dies in 2026 the shares are worth $500 each. His daughter inherits the shares with a basis of $500 each (the FMV on date of death), not $50. If she sells the next day for $502, her taxable long-term capital gain is $2 per share, not $452. The entire $450 per share of pre-death appreciation evaporates from the income-tax base.
The executor of the estate can elect an alternate valuation date 6 months after death on IRS Form 706 if doing so reduces both the gross estate value and the estate tax owed. This is mostly relevant for estates above the 2026 federal estate exemption ($13.99 million per person, scheduled to roughly halve at the end of 2025 unless extended; check current law before relying). Estates below the exemption still get the step-up, no estate tax return required.
How it works
Heir's basis = Fair Market Value on Date of Death (or alternate valuation date) Heir's taxable gain on sale = Sale price - Heir's stepped-up basis Tax saved vs no step-up = (Sale price - Decedent's original basis) - (Sale price - Stepped-up basis) x heir's long-term capital gains rate (0%, 15%, or 20% in 2026)
- Fair Market Value (FMV): the price a willing buyer would pay a willing seller, neither under compulsion. For publicly traded stock it is the average of the high and low on the date of death; for real estate it is a qualified appraisal.
- Date of Death (DoD): the legal date the decedent died, as recorded on the death certificate.
- Alternate Valuation Date: 6 months after death; only available if (a) the estate files Form 706 and (b) the election reduces both gross estate and estate tax due.
- Heir's holding period: automatically long-term, regardless of how long the heir actually holds the asset (IRC section 1223(9)).
Worked example
A father bought 100 shares of a stock for $1,000 ($10 per share) in 1985 and the position is worth $80,000 ($800 per share) on his date of death in March 2026. His son inherits and sells two months later for $82,000.
- Decedent's original basis: $1,000.
- Fair market value on date of death (stepped-up basis): $80,000.
- Son's sale price two months later: $82,000.
- Son's taxable long-term gain: $82,000 minus $80,000 = $2,000.
- Federal tax saved vs no step-up at 15 percent rate: ($80,000 minus $1,000) x 15 percent = $11,850.
Common pitfalls
- Assuming retirement accounts step up. They do not. Inherited Traditional IRA, 401(k), 403(b), and annuity balances retain their pre-tax character and trigger ordinary income tax on every dollar the heir withdraws, on top of the SECURE Act 10-year drain rule.
- Gifting highly appreciated assets during life. The recipient inherits the donor's original basis under IRC section 1015 (carryover basis) and loses any step-up the asset would have received at death. Better to hold low-basis assets until death and gift high-basis assets while alive.
- Missing the double step-up in community-property states. Couples in AZ, CA, ID, LA, NV, NM, TX, WA, and WI can title appreciated assets as community property to get a full step-up on both halves at the first death. Joint-tenancy titling in those states only gives a half step-up.
- Ignoring the alternate valuation date. If markets dropped sharply between the date of death and 6 months later, the executor can elect the lower FMV to reduce estate tax, but this also lowers the step-up the heir receives. Election is irrevocable.
- Failing to document FMV. For private businesses, real estate, and thinly traded securities, the IRS will reconstruct basis from public records if no appraisal exists, usually to the family's disadvantage. A date-of-death appraisal pays for itself.
- Not reporting basis on Schedule D. The heir reports the sale on Form 8949 with the stepped-up basis in Column (e); the brokerage 1099-B usually does NOT update the basis automatically and many taxpayers overpay tax by using the old basis from the 1099.
Related terms
Related calculators on 3Tej
Run your own step-up scenario or compare to capital gains tax without step-up:
Frequently asked questions
What is step-up in basis?
Step-up in basis is a US tax rule under IRC section 1014 that resets the cost basis of inherited assets to fair market value on the date of the original owner's death. The heir's taxable capital gain is measured from that stepped-up basis, not from what the decedent originally paid. Decades of pre-death appreciation simply disappear from the income-tax base.
Does step-up apply to all inherited assets?
Most non-retirement assets qualify: individual stocks, ETFs, mutual funds outside an IRA, taxable bonds, real estate, closely held businesses, collectibles, and personal property. The big exceptions are Traditional IRAs, 401(k)s, 403(b)s, and other tax-deferred retirement accounts, where the heir still pays ordinary income tax on every distribution. Roth IRAs are tax-free to heirs already, so step-up is irrelevant.
What is the basis if the asset has gone down in value at death?
Section 1014 works both directions. If the asset is worth less at death than the decedent paid, the heir takes a stepped-DOWN basis equal to FMV on the date of death, permanently losing the unrealized loss. Lifetime gifting of losing assets can sometimes preserve part of that loss for the original owner, but it never carries over to the heir on death.
Does step-up apply to gifted assets?
No. A lifetime gift carries the donor's original cost basis to the recipient (the carryover-basis rule under IRC section 1015). The recipient also inherits the donor's holding period. This is why high-basis assets are often better to gift while alive, while heavily appreciated low-basis assets are usually better to hold until death and pass through the estate to get the step-up.
How does step-up work for jointly held property?
In common-law states (most US states), only the deceased spouse's half steps up on the first death; the survivor's half keeps its original basis. In the nine community-property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), both halves can step up to FMV if the property is community property, the so-called double step-up. Alaska, Florida, Kentucky, South Dakota, and Tennessee allow elective community-property trusts that can replicate this.
Will Congress eliminate step-up in basis?
It has been proposed many times but never enacted. The Biden administration's American Families Plan in 2021 would have eliminated step-up on inherited gains above $1 million per person, but the proposal was dropped before the Inflation Reduction Act was signed. As of May 2026 step-up in basis remains a fully operative feature of US estate planning. Active legislative bills should always be checked before relying on the rule for a multi-decade plan.
Sources and further reading
- IRS / Cornell LII 26 U.S. Code Section 1014: Basis of property acquired from a decedent - the statute that creates step-up.
- IRS Publication 559 (2025) Survivors, Executors, and Administrators - basis of inherited property, Form 706 election, alternate valuation date.
- Joint Committee on Taxation (2023) Estimates of Federal Tax Expenditures for Fiscal Years 2023-2027 - revenue cost of stepped-up basis at death.
- Congressional Research Service (2024) The Step-Up in Basis at Death: Tax Treatment and Recent Proposals (Report R47125).
- IRS Form 8949 and Schedule D instructions - reporting an inherited-asset sale with stepped-up basis (use code "I" for long-term inherited).