The Step-Up in Basis Rule: Why It Matters for Heirs

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When my grandfather passed away, our family inherited a small rental property he bought decades earlier. We braced for a massive tax bill because the property had appreciated so much over the years. To our relief, the tax hit was far smaller than expected — thanks to the step-up in basis rule.

That experience taught me how crucial this rule is for families transferring wealth. If you’re planning an estate or expecting an inheritance (property, stocks, or other assets), understanding the step-up in basis could save you — or your heirs — a substantial amount in taxes.

What Is the Step-Up in Basis Rule?

The step-up in basis resets the cost basis of an inherited asset to its fair market value (FMV) at the date of the decedent’s death.

• Cost basis = the original value of an asset for tax purposes.
• Step-up = adjustment of that basis to the asset’s current market value.

In plain terms: if a parent bought stock for $50,000 years ago and it’s worth $200,000 when they die, your new basis is $200,000. Sell right away and you’ll owe little or no capital gains tax.

Why It Matters for Heirs

• Reduces capital gains taxes: Heirs can often sell inherited assets with little or no tax on appreciation that occurred before the decedent’s death.
• Simplifies recordkeeping: No need to track decades-old purchase prices for tax purposes.
• Preserves wealth: More of the inheritance stays with the family rather than going to taxes.

According to the IRS, inherited assets generally receive a step-up in basis to the decedent’s date-of-death FMV.

Real-World Case Studies

Case Study 1: Family Home Appreciation

Sarah inherited her mother’s home, purchased in 1980 for $80,000. At her mother’s death, the home’s fair market value was $500,000.

• Old basis: $80,000
• Stepped-up basis: $500,000
• If Sarah sells for $510,000, her taxable gain is only $10,000 — not $430,000.

Case Study 2: Stock Portfolio Windfall

James inherited stocks his father bought for $100,000 in the 1990s. At inheritance they were worth $1,000,000. With the step-up, his basis becomes $1,000,000. Selling at the same price yields no capital gains tax.

Case Study 3: Rental Property Dilemma

David inherits a rental property bought for $200,000 and now worth $750,000. The stepped-up basis resets depreciation and allows larger annual deductions based on the new value, reducing taxable rental income.

Comparison: Step-Up in Basis vs. No Step-Up

Scenario	Without Step-Up (Old Basis)	With Step-Up (New Basis)	Tax Impact for Heirs
Inherited House	$80K → Sell at $500K = $420K taxable gain	$500K → Sell at $500K = $0 taxable gain	Huge savings
Stock Portfolio	$100K → Sell at $1M = $900K taxable gain	$1M → Sell at $1M = $0 taxable gain	Preserves inheritance
Rental Property	Lower depreciation deductions	Higher depreciation (based on new value)	More deductions for heirs

Limits and Important Exceptions

While powerful, the step-up rule has limits and nuances to consider:

• No step-up for gifts: Assets gifted during life retain the giver’s basis (so big gifts can trigger capital gains when sold by recipients).
• Retirement accounts: IRAs and 401(k)s do not receive a step-up; beneficiaries pay income tax on distributions.
• Community property states: In some states (California, etc.), surviving spouses may receive a double step-up in community property assets.
• Valuation required: Executors generally need a qualified appraisal or other reliable valuation to establish the date-of-death FMV for tax records.
• Policy risk: There have been proposals in Congress to modify or limit the step-up rule — so stay informed.

Practical Estate Planning Tips

• Keep records: Even if step-up applies, you'll need accurate death-date valuations and documentation.
• Consider trusts: Revocable living trusts can streamline transfer and preserve basis benefits while offering privacy.
• Think about timing: If heirs plan to keep an asset, timing sales may affect tax outcomes; consult a tax advisor.
• Work with professionals: Use an estate attorney and CPA to handle complex estates, appraisals, and tax filings.

Why the Step-Up Rule Matters to Families

The step-up in basis rule is a cornerstone of modern estate planning because it can dramatically reduce the tax burden on inherited assets. Families who understand and plan for it often preserve far more wealth for future generations, while those who overlook it may face unexpected tax bills and difficult choices.

Conclusion

If you own appreciated assets — real estate, stocks, collectibles — include the step-up in basis rule in your estate planning conversations. Review your plan with a qualified tax professional and estate attorney, obtain proper valuations at death, and communicate your intentions to your heirs.

Your turn: Have you or your family sold an inherited asset? How did taxes affect the outcome? Share your experience below or sign up for our newsletter at Trust and Transition for practical estate planning tips.