Definition
A step-up in basis resets the cost basis of an inherited asset to its fair market value at the owner's death.
How It Works
When an heir inherits an appreciated asset, its basis is adjusted to the date-of-death value, erasing the capital gain that built up during the original owner's life. Selling shortly after inheriting then produces little or no taxable gain.
Example
A child inherits stock worth $1 million that the parent bought for $200,000. The basis steps up to $1 million, eliminating tax on the $800,000 of lifetime appreciation if sold near that value.
When It Works Best
It is central to estate planning, often favoring holding highly appreciated assets until death rather than selling during life.
Who It Applies To
Heirs of appreciated assets.
Watch-Outs
The step-up applies to capital appreciation, but assets in certain accounts, like Traditional IRAs, do not receive it. Estate tax may still apply to large estates.
