Estate & Legacy

Step-Up in Basis

When assets pass at death, heirs often receive a stepped-up cost basis that eliminates unrealized capital gains. Understand how this works and its role in estate and tax planning.

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

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

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

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The information above is for educational purposes only and does not constitute investment advice, a recommendation, or a solicitation to buy or sell any security. Any historical figures are for illustration only, and past performance does not guarantee future results. Tax laws, regulations, and contribution limits change frequently, the details here may become outdated. Individual circumstances vary. Consult a qualified financial advisor, CPA, or attorney for guidance specific to your situation. Rubric Advisors is registered with the California DFPI; registration does not imply a certain level of skill or training.

Step-Up in Basis

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

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

Step-Up in Basis

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

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