What is a stepped-up basis?

A stepped-up basis (also called step-up in basis) is a tax provision that resets the cost basis of an inherited asset to its fair market value on the date of the original owner's death. This eliminates the capital gains tax on all appreciation that occurred during the deceased's lifetime. For example, if your parent bought stock for $10,000 that was worth $100,000 when they died, your cost basis is reset to $100,000 — and you owe no capital gains tax on the $90,000 gain.

Which assets qualify for a stepped-up basis?

Assets that qualify for a stepped-up basis include stocks and investment accounts, real estate (investment property and primary residence), mutual funds, bonds, business interests, and most other capital assets held in a taxable account at death. Assets that do NOT get a step-up: assets in IRAs and 401(k)s (ordinary income tax still applies when withdrawn), assets in revocable trusts (generally do get a step-up), and assets gifted during the donor's lifetime (receive the donor's original cost basis instead).

What is the difference between a stepped-up basis and a carryover basis?

A stepped-up basis resets the basis to fair market value at death — inherited from a deceased person. A carryover basis is the opposite — it keeps the original owner's cost basis and 'carries over' to the new owner. Gifts made during lifetime use carryover basis. Inherited assets use stepped-up basis. This distinction is critical: a $500,000 gift of low-basis stock triggers a large capital gains tax when the recipient eventually sells; the same stock inherited at death would have $0 capital gains tax.

Does a stepped-up basis apply to jointly owned property?

For jointly owned property between spouses (joint tenancy with right of survivorship or tenancy by the entirety), the surviving spouse receives a step-up in basis for the deceased spouse's share — typically 50% of the asset in common law states. In community property states (California, Texas, Arizona, and others), the surviving spouse receives a full step-up on 100% of community property — a much more favorable outcome. Moving assets to community property states or using community property trusts can double the step-up benefit.

Stepped-Up Cost Basis Guide 2026 — How Inherited Assets Avoid Capital Gains Tax

The stepped-up basis is one of the most powerful tax benefits in the US tax code. When you inherit an asset, the IRS resets the cost basis to its fair market value on the date of death — eliminating all capital gains tax on appreciation that occurred during the deceased’s lifetime. For highly appreciated stocks, real estate, or business interests, this can represent tens or hundreds of thousands of dollars in avoided taxes.

Key takeaway: Inherited assets get their basis “stepped up” to the fair market value at the date of death. If you inherit stock worth $200,000 that your parent bought for $10,000, you owe $0 in capital gains tax on that $190,000 gain — and only owe capital gains tax on appreciation after you inherited it.

How Stepped-Up Basis Works — A Clear Example

Scenario 1: Sold during lifetime (no step-up)

Parent buys 1,000 shares of Apple stock in 2000 at $1/share = cost basis $1,000
Shares are worth $200,000 in 2026
Parent sells in 2026: taxable gain = $199,000 → capital gains tax ≈ $29,850 (at 15% rate)

Scenario 2: Inherited at death (stepped-up basis)

Same shares: worth $200,000 at parent’s death in 2026
Child inherits the shares: new cost basis = $200,000 (stepped up from $1,000)
Child sells immediately: taxable gain = $0
Child sells 5 years later when shares are worth $250,000: taxable gain = $50,000 (only the appreciation since inheritance)

Which Assets Get a Stepped-Up Basis?

Assets That Qualify (Basis Is Reset to Fair Market Value at Death)

Stocks, ETFs, mutual funds held in a taxable brokerage account
Real estate (rental property, vacation homes, primary residence)
Investment-grade bonds
Closely held business interests
Collectibles (art, coins, antiques)
Cryptocurrency holdings

Assets That Do NOT Get a Stepped-Up Basis

Asset	Why No Step-Up	Tax Treatment Instead
Traditional IRA / 401(k)	Tax-deferred accounts — withdrawals always taxed as ordinary income	Beneficiary pays ordinary income tax on all withdrawals
Roth IRA	Tax-free accounts — but basis already after-tax	Qualified withdrawals remain tax-free for beneficiary
Annuities	Contract-based; separate tax rules	Ordinary income tax on earnings
Savings bonds	Tax rule exception; interest taxed at redemption	Ordinary income on interest

Carryover Basis vs Stepped-Up Basis: The Gift-vs-Inherit Decision

You Receive	Basis Rule	Capital Gains When You Sell
Gift (donor alive)	Carryover basis — keeps donor’s original cost	Taxed on ALL appreciation from original purchase
Inheritance (donor died)	Stepped-up basis — reset to date-of-death value	Only taxed on appreciation AFTER inheritance

The critical implication: Never accept a gift of highly appreciated stock if you expect to sell it soon. The same asset inherited is much better from a tax perspective. Donors with highly appreciated assets often benefit from holding them until death rather than gifting them.

Exception: Gifts can make sense when the recipient is in the 0% capital gains tax bracket (taxable income under $47,025 single / $94,050 MFJ in 2026) — the gift recipient can sell immediately with zero federal capital gains tax.

Community Property States: The Double Step-Up

In common law states (most states), jointly owned assets typically receive only a 50% step-up at the first spouse’s death — the deceased spouse’s half is stepped up; the surviving spouse’s half retains original basis.

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), ALL community property receives a 100% step-up at the death of either spouse — both halves are reset.

State Law	Step-Up at First Death
Common law states (e.g., New York, Florida)	50% of joint assets stepped up
Community property states (e.g., California, Texas)	100% of community assets stepped up

Planning opportunity: Married couples in common law states can sometimes use a community property trust or relocate assets to gain community property treatment and the double step-up benefit.

Estate Tax vs Capital Gains Tax: Two Different Taxes

Tax	Who Pays	2026 Threshold
Estate tax (federal)	Estate of deceased	Estates over $13.99 million (2026)
Capital gains tax	Heir who sells	Based on gain after inherited basis

Most Americans (over 99%) do not owe federal estate tax. The stepped-up basis benefit is available to ALL heirs regardless of estate size — it is not limited to large estates.

Tax Planning Strategies Involving Stepped-Up Basis

Hold appreciated assets until death — for assets with large unrealized gains you don’t need to sell
Gift low-basis assets to charities — avoid capital gains and get a fair market value deduction
Harvest losses to offset gains — sell losers before death; no step-down for unrealized losses
Avoid gifting highly appreciated assets — the carryover basis rule makes gifts of appreciated stock tax-costly for the recipient
Use a trust — revocable living trusts preserve the step-up; irrevocable trusts may not

Capital Gains Tax 2026 — full capital gains hub
How to Avoid Capital Gains Tax — deferral and reduction strategies
Depreciation Recapture Tax — recapture on inherited rental property
Capital Gains Tax on Real Estate — Section 121 primary residence exclusion

Written by WealthVieu

WealthVieu researches and writes data-driven personal finance guides using primary sources including the IRS, Bureau of Labor Statistics, Federal Reserve, and Census Bureau.

The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy