About step-up in basis
The step-up in basis is one of the most valuable rules in US estate planning. When someone dies and passes an asset to an heir, the asset's cost basis, the number used to measure taxable gain when it is sold, resets to its fair market value on the date of death. All the appreciation that built up during the original owner's lifetime simply disappears for tax purposes. This calculator compares the capital gains tax an heir would pay with the step-up against what they would pay without it, so you can see the saving in dollars.
Why it matters: capital gains tax is charged on the difference between what you sell an asset for and its basis. For an asset bought decades ago, that gain can be enormous. The step-up replaces the old purchase price with the date-of-death value, so an heir who sells soon after inheriting often owes little or no capital gains tax. It applies to most assets passed at death, such as stocks, funds, and real estate, but not to tax-deferred retirement accounts like traditional IRAs.
Heirs, executors, and families planning ahead use this tool to estimate the tax on selling inherited property or securities, and to weigh selling now against holding for further growth.
How the calculation works
The tool computes the tax both ways and shows the difference:
Tax without step-up = (Sale price - Original basis) x Tax rate Stepped-up basis = Value at date of death Tax with step-up = max(0, Sale price - Date-of-death value) x Tax rate Tax savings = Tax without step-up - Tax with step-up
- Original basis is what the deceased originally paid; without the step-up this drives a large taxable gain.
- Value at death becomes the new basis, so only growth after the inheritance is taxed.
- Tax rate is the heir's long-term capital gains rate (commonly 15 or 20 percent), since inherited assets are automatically treated as long-term.
Worked example
You inherit stock the deceased bought for 50,000 dollars. It is worth 500,000 dollars on the date of death, and you sell it for 520,000 dollars. Your capital gains rate is 20 percent.
- Without step-up: gain is 520,000 - 50,000 = 470,000 dollars; tax at 20 percent = 94,000 dollars.
- Stepped-up basis: the new basis is 500,000 dollars, the date-of-death value.
- With step-up: gain is 520,000 - 500,000 = 20,000 dollars; tax at 20 percent = 4,000 dollars.
- Tax savings: 94,000 - 4,000 = 90,000 dollars.
- Sell at exactly 500,000 instead and the gain, and the tax, would be zero.
What does and does not step up
General treatment of common inherited assets in the US. Confirm specifics with a tax professional.
| Asset type | Step-up at death? | Note |
|---|---|---|
| Stocks and mutual funds (taxable) | Yes | Basis resets to date-of-death value |
| Real estate (non-retirement) | Yes | Includes a primary home or rental |
| Traditional IRA / 401(k) | No | Withdrawals taxed as ordinary income |
| Community property (both halves) | Yes (double) | Full asset steps up in community property states |
| Lifetime gifts | No | Carryover basis from the giver |
Common pitfalls
- Expecting a step-up on IRAs. Traditional IRAs and 401(k)s do not step up; inherited withdrawals are taxed as ordinary income.
- Confusing it with estate tax. The step-up is an income-tax rule for heirs; the federal estate tax is a separate tax on large estates before they pass.
- Missing the double step-up. In community property states, a surviving spouse may step up the entire asset, not just half, a large potential saving.
- Gifting appreciated assets before death. A lifetime gift keeps the original low basis, so the recipient loses the step-up they would have gotten by inheriting instead.
- Ignoring date-of-death valuation. You need a proper fair-market valuation as of the death date; guessing can trigger problems if the IRS reviews the sale.
Frequently asked questions
What is a step-up in basis?
A step-up in basis resets the cost basis of an inherited asset to its fair market value on the date of the original owner's death. Cost basis is the figure used to measure capital gain when you sell, so resetting it to the date-of-death value erases all the appreciation that built up during the deceased owner's lifetime. If an heir sells the asset soon after inheriting, the taxable gain is measured only from that stepped-up value, which often means little or no capital gains tax.
How does step-up in basis reduce taxes?
Without a step-up, selling an inherited asset would be taxed on the gain from the original purchase price, which can be decades of growth. With the step-up, the basis becomes the date-of-death value, so only gains after the inheritance are taxed. For example, stock bought for 50,000 dollars and worth 500,000 dollars at death gets a new basis of 500,000; selling at 500,000 produces zero capital gain instead of a 450,000 dollar taxable gain.
Do all inherited assets get a step-up in basis?
Most capital assets passed at death do, including stocks, mutual funds, and real estate held outside a retirement account. Notable exceptions are tax-deferred accounts such as traditional IRAs and 401(k)s, which do not receive a step-up because withdrawals are taxed as ordinary income. Assets held in certain irrevocable trusts may not qualify, and gifts given during the owner's lifetime keep the original carryover basis rather than stepping up.
What is a double step-up in community property states?
In the nine community property states, when one spouse dies the entire jointly held community asset can receive a step-up, not just the deceased spouse's half. This double step-up means the surviving spouse can sell with little or no capital gains tax on the whole asset. In common-law states, only the deceased spouse's share of a jointly owned asset is stepped up, so half the appreciation can still be taxable on a later sale.
Is the step-up in basis the same as avoiding estate tax?
No, they are separate. The step-up in basis is an income-tax rule that reduces capital gains tax for heirs. The federal estate tax is a separate tax on the value of a large estate before it passes to heirs, applying only above a high exemption. An estate can owe estate tax and still pass assets with a stepped-up basis; conversely most estates owe no estate tax yet still benefit from the step-up. This tool estimates the capital gains side only.