How Unrealized Gains Disappear

Stock purchased at $10 and worth $100 at death gets a new basis of $100 If the heir sells at $100, the taxable gain is zero rather than $90 Decades of appreciation can be eliminated in a single generational transfer This benefit can be worth more than many other estate planning strategies

Community Property Double Step-Up

In community property states, both halves of jointly held assets get stepped up The surviving spouse receives a full basis reset on the entire asset Common-law states only step up the decedent's share of jointly owned property This distinction can create significant tax differences depending on state of residence

Assets That Qualify and Those That Do Not

Stocks, bonds, mutual funds, ETFs, and real estate in taxable accounts qualify Closely held business interests, collectibles, and precious metals also qualify Traditional IRAs and 401(k)s are taxed as ordinary income — no step-up applies Assets gifted during life keep the donor's original cost basis instead

Holding vs Gifting Appreciated Assets

Gifting during life carries over the donor's low basis to the recipient Holding appreciated assets until death allows heirs to benefit from the step-up Gifting may still make sense if the asset is expected to appreciate much further The decision depends on comparing gift tax savings against lost step-up benefits

Interaction With the Lifetime Exemption

Assets included in the taxable estate can still receive the step-up in basis Estates below the exemption threshold get both tax-free transfer and stepped-up basis Larger estates may face estate tax but heirs still benefit from the new basis Using the lifetime exemption does not prevent the basis step-up from applying

Legislative Risk and Planning Considerations

Congress has periodically proposed limiting or eliminating the step-up benefit A $2M home purchased at $200K saves heirs roughly $270K in federal capital gains tax Identify which assets in your portfolio have the largest unrealized gains Document original cost basis carefully so heirs can establish the stepped-up value

Step-Up in Basis

Curated by: Rubric Advisors

Step-Up in Basis

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What Step-Up in Basis Means

Cost basis of inherited assets resets to fair market value at the date of death
This eliminates all unrealized capital gains that accrued during the owner's life
Heirs who sell immediately may owe little or no capital gains tax
The step-up applies automatically — no special election is required

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What Step-Up in Basis Means

How Unrealized Gains Disappear

Community Property Double Step-Up

Assets That Qualify and Those That Do Not

Holding vs Gifting Appreciated Assets

Interaction With the Lifetime Exemption

Legislative Risk and Planning Considerations

Related Topics

Joint Account Types: JTWROS, Tenants in Common, and More

Taxable Brokerage Accounts: When and How to Use Them

Gifting Appreciated Stock: A Tax-Smart Way to Give

What Step-Up in Basis Means

How Unrealized Gains Disappear

Community Property Double Step-Up

Assets That Qualify and Those That Do Not

Holding vs Gifting Appreciated Assets

Interaction With the Lifetime Exemption

Legislative Risk and Planning Considerations

Related Topics

Joint Account Types: JTWROS, Tenants in Common, and More

Taxable Brokerage Accounts: When and How to Use Them

Gifting Appreciated Stock: A Tax-Smart Way to Give