Understanding the Step-Up in Basis for Inherited Assets

When you inherit assets after a loved one passes, you may receive a valuable — though often misunderstood — tax benefit known as the step-up in basis. Here’s a breakdown of what it means and what steps you may need to take as an heir or while planning your estate.

What Is “Basis”?

Your basis in an asset is typically the original purchase price, adjusted for things like improvements, depreciation, or returns of capital. When you sell the asset, the capital gain or loss is calculated by subtracting this basis from the sale price.

The Step-Up in Basis Rule

When someone dies, most capital assets — such as stocks, real estate, business interests, collectibles, or cryptocurrency — receive a step-up (or step-down) in basis. The new basis becomes the fair market value (FMV) of the asset on the date of death (or, if elected by the executor, the FMV six months later under the alternate valuation date rule).

This adjustment eliminates capital gains tax on any appreciation that occurred during the decedent’s lifetime.

Example:
Your father purchased stock for $50,000. At the time of his death, it’s worth $220,000. You inherit the stock with a new basis of $220,000. If you sell it for that same amount, you owe no capital gains tax. If you sell it later for $260,000, you only recognize a $40,000 gain — the increase since the date of death.

Important: Some assets — like traditional IRAs and 401(k)s — do not receive a step-up in basis.

Action Steps for Heirs

After inheriting assets, you should:

• Document the fair market value as of the date of death using appraisals, brokerage statements, Zillow estimates, crypto exchange screenshots, etc.
  
• Retitle the assets into your name or trust promptly to avoid administrative delays.
  
• Keep detailed records, as they’ll be critical if you sell the asset in the future or face IRS questions.
  

Planning Tips for Asset Owners

If you’re doing estate planning:

• Identify assets with low basis that you intend to hold until death to ensure they benefit from a step-up.
  
• Consider tax-loss harvesting for assets that won’t be held long enough for a step-up.
  
• Understand the tax impact of lifetime gifts — gifted assets retain a carryover basis, meaning the recipient’s basis is the same as yours.
  

Final Thoughts

The step-up in basis can significantly reduce tax liability on inherited assets. However, exceptions and special rules may apply:

• Executors may elect an alternate valuation date.
• Gifts made shortly before death (“deathbed gifts”) may still be included in the estate for tax purposes.

For more information and guidance on inherited assets and estate planning, reach out to Morgan Tax Group