Step-Up in Basis
The reset of an inherited asset's cost basis to its fair market value at the date of the original owner's death.
What is Step-Up in Basis?
A step-up in basis (also called stepped-up basis) is a tax provision that resets the cost basis of an inherited asset to its fair market value on the date the original owner died, rather than the original purchase price. This means heirs who inherit appreciated assets pay capital gains tax only on appreciation that occurred after they inherited the asset — not on gains accumulated over the original owner's lifetime. Step-up in basis can result in significant tax savings for heirs of highly appreciated assets such as stocks held for decades or real estate. If the inherited asset has declined in value, a 'step-down' applies instead. The provision is a major estate planning tool.
Example
A parent bought Amazon stock in 2005 for $1,000 (cost basis = $1,000). At their death in 2024, the stock was worth $180,000. The heir inherits the stock with a stepped-up basis of $180,000. If they immediately sell at $180,000, they owe zero capital gains tax. Without the step-up, they would owe tax on a $179,000 gain.
Source: IRS — Publication 559, Survivors, Executors, and Administrators