Understanding the Step-Up in Cost Basis of Assets at Death
When a person passes away, one of the most significant tax advantages that transfers to their heirs is called the “step-up in cost basis”. For those inheriting appreciated assets, this provision can mean the difference between owing hundreds of thousands of dollars in capital gains taxes and owing nothing at all.
What Is Cost Basis?
In general, your cost basis in an asset is simply what you paid for it. For a home or property, the cost basis is simply what you pay plus any home improvements made. For stocks or other financial investments, the basis is what was originally paid, plus any reinvested dividends and minus any sells that may happen over time.
When you sell the asset, the IRS taxes you on the gain — the difference between the sale price and your original cost. The longer an asset is held and the more it appreciates, the larger the potential tax bill upon sale.
What Is the Step-Up?
When a person dies, the cost basis of assets in their estate is “stepped up” to the fair market value on the date of death. A lifetime of appreciation is essentially erased for tax purposes — heirs inherit the asset as if they purchased it at its current value.
Example
Your father bought 500 shares of stock in 1985 for $1,000 total. By his death in 2025, the shares are worth $100,000. Had he sold them prior to his death, he would have owed capital gains tax on the $99,000 gain. However, because you inherit the shares at his death, your basis resets to $100,000. Should you subsequently sell the shares for $100,000, there will be no realized capital gains on the transaction.
What Qualifies?
The step-up in basis applies to assets passing through an estate: stocks and bonds in brokerage accounts, real estate, and closely held business interests. It does not apply to IRAs, 401(k)s, or annuities, where gains are taxed as ordinary income upon withdrawal regardless.
Key Planning Takeaways
Hold, don't sell. Highly appreciated assets are often better held until death than sold during the owner's lifetime.
Avoid gifting low-basis assets to family members who would inherit the asset upon your death. When making gifts during your lifetime, the original cost basis (what you paid) would carry over to the recipient, losing the possibility of a step-up benefit. Leaving appreciated assets in your estate is almost always more tax-efficient.
Asset location matters. Intentionally investing in tax-efficient, growth investments like stocks in taxable accounts can serve the purpose of maximizing the step-up benefit. It is important to be strategic when making decisions of which investments should be held in which type of account.
The step-up in cost basis is one of the most generous wealth-transfer provisions in the tax code. It is important to understand the nuances of the rules surrounding the step-up in basis and how this could impact your family and other beneficiaries.