What Is a Step-Up in Basis on Inherited Assets?

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When a beneficiary inherits an appreciated asset—such as stock, a home, or a business interest—the IRS typically allows the cost basis of that asset to be “stepped up” to its fair market value (FMV) as of the date of the original owner’s death.

This means that any unrealized capital gains that occurred during the original owner's lifetime are effectively erased. The beneficiary's new basis is the asset’s value on the date of death, which significantly reduces taxable gains if the asset is later sold.

Step-Up in Basis Example Using Stock

Let’s say a parent purchased 1,000 shares of Apple Inc. (AAPL) at $10 per share many years ago—totaling a $10,000 cost basis. At the time of their death, the shares are worth $180 per share, or $180,000 in total.

  • Original basis: $10,000

  • Value at death (new basis): $180,000

  • Sale by heir: $185,000

  • Taxable gain: $5,000

Instead of paying capital gains tax on $175,000, the heir only owes tax on the $5,000 increase that occurred after they inherited the shares. This is the power of a properly applied step-up in basis for inherited stock.

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Which Assets Receive a Step-Up in Basis?

Most taxable assets are eligible for a step-up in basis at death, including:

  • Individual stocks and bonds

  • Exchange-traded funds (ETFs) and mutual funds

  • Real estate (primary residences, rental property, land)

  • Collectibles (art, antiques, etc.)

  • Interests in privately held businesses

These are commonly referred to as capital assets, and the adjustment to their basis helps reduce or eliminate capital gains tax when sold by the heir.

Assets That Do Not Receive a Step-Up in Basis

Some assets do not qualify for a step-up in basis. It’s important to understand how they are taxed differently:

  • Cash and bank accounts – Do not appreciate in value, so there’s no cost basis to adjust.

  • IRAs and 401(k)s – These are pre-tax retirement accounts. Distributions are taxed as ordinary income, not capital gains, and thus are not eligible for a step-up.

  • Annuities – Gains are taxed as ordinary income when withdrawn.

  • U.S. Savings Bonds – Accrued interest is taxable when redeemed; no step-up applies.

For inherited retirement accounts, different rules govern distributions and tax treatment. Learn more about IRA beneficiary rules here.

Key Planning Considerations for Step-Up in Basis

Understanding how step-up in basis rules interact with your estate plan can lead to more tax-efficient outcomes for your beneficiaries.

  • Gifting vs. Inheriting: Appreciated assets gifted during your lifetime carry over your original basis to the recipient. If those same assets are inherited instead, the beneficiary typically receives a step-up in basis—greatly reducing potential capital gains taxes.

  • Diversification Opportunity: Many investors hold onto concentrated positions—such as legacy holdings in companies like AAPL—because of the tax consequences of selling. After inheritance, however, the step-up in basis gives heirs a chance to diversify without triggering major tax liability. This allows them to realign their portfolios with long-term goals and risk tolerance.

  • Community Property Rules: In community property states (like California or Texas), a surviving spouse may receive a full step-up in basis on jointly owned assets—not just their deceased spouse’s half. This can unlock significant tax benefits in joint estate planning.

  • Trust Design Impacts: Assets held in certain irrevocable trusts may not receive a step-up in basis unless they are included in the taxable estate. Coordinating with both a tax advisor and estate attorney is essential when designing trusts for generational wealth transfer.

Final Thoughts

The step-up in basis is one of the most important tax planning tools available when transferring taxable assets. When used strategically, it can eliminate years—or even decades—of embedded capital gains and help heirs make better financial decisions with inherited wealth.

At Vaultis Private Wealth, we approach every client with an understanding of their unique goals, values, and financial complexities. We help implement tax-smart estate planning strategies that align with your vision—so that what you’ve built can be preserved and passed on with intention.

Frequently Asked Questions

What is a step-up in basis?

A step-up in basis increases the cost basis of an inherited asset to its fair market value on the date of death. This often reduces or eliminates capital gains taxes if the asset is sold soon after inheritance.

Does the step-up in basis apply to retirement accounts like IRAs or 401(k)s?

No. Retirement accounts such as IRAs, Roth IRAs, and 401(k)s do not receive a step-up in basis because they are taxed differently — either as ordinary income or tax-free in the case of Roth accounts.

Do jointly owned assets receive a full step-up in basis?

It depends on the state and how the assets are titled. In community property states, both halves of a jointly owned asset may receive a full step-up. In separate property or common law states, typically only the decedent’s share receives a step-up.

What happens if I sell an inherited asset shortly after receiving it?

If the asset’s value hasn’t changed much since the date of death, you’ll likely owe little to no capital gains tax due to the step-up. The gain or loss is measured against the stepped-up basis, not the original purchase price.

What documentation should I keep to support the step-up in basis?

Keep records that show the asset’s fair market value as of the date of death — such as brokerage statements, qualified appraisals, or real estate comps. This information is critical in case of an IRS inquiry or future sale.

Disclosure: This communication is for informational purposes only and should not be construed as investment, legal, or tax advice. The information provided is based on current laws and regulations, which are subject to change. Vaultis Private Wealth (“Vaultis”) is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Vaultis and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future results. All investments involve risk, including the potential loss of principal. Consult with a qualified financial, legal, or tax professional before making any decisions based on this content.