Basis Step-Up
The reset of an inherited asset's cost basis to its fair market value on the date of the original owner's death.
What is Basis Step-Up?
A basis step-up (also called a stepped-up basis) occurs when a person inherits an asset and the cost basis is reset to the asset's fair market value (FMV) on the date of the original owner's death, rather than the owner's original purchase price. This provision under IRC Section 1014 can eliminate capital gains tax on all appreciation that occurred during the decedent's lifetime. If the beneficiary later sells the asset, only gains accrued after the date of death are subject to capital gains tax. The step-up applies to most inherited assets including stocks, real estate, and business interests.
Example
A parent purchased Apple stock for $10,000 in 2005. At their death in 2024, the shares are worth $150,000. The heir inherits the stock with a stepped-up basis of $150,000. If they sell immediately, no capital gains tax is owed. If they hold and later sell for $160,000, only the $10,000 gain above the stepped-up basis is taxable.