The short answer
The step-up in basis is a tax rule that resets the cost basis of most inherited assets to their value on the date of the original owner's death. This means an heir who sells an inherited asset generally owes capital gains tax only on the appreciation since the date of death, not on the growth during the original owner's lifetime, which can eliminate a large amount of taxable gain. It is one of the most valuable tax benefits in estate planning and affects decisions about whether to sell or hold appreciated assets during life. This is educational information, not tax advice.
So the step-up in basis resets an inherited asset's cost basis to its date-of-death value, wiping out capital gains from the owner's lifetime.
How it works
Suppose someone bought stock long ago that grew substantially. If they sold it during life, they would owe capital gains tax on all that growth. But if they hold it and it passes to an heir, the heir's basis steps up to the value at the date of death, so if the heir sells soon after, there may be little or no taxable gain. The same generally applies to other appreciated assets like real estate. This is why holding highly appreciated assets until death, rather than selling, can be tax-advantageous. Our guide to capital gains in retirement covers the gains this interacts with.
The reset to date-of-death value is what erases the lifetime appreciation from the heir's taxable gain.
Why it matters for planning
The step-up in basis influences decisions about which assets to spend down versus hold: it can make sense to hold highly appreciated assets to pass to heirs with a stepped-up basis, while spending other assets. It interacts with estate tax planning and can differ for certain assets and in community-property situations. Because the rules are nuanced and can change, work with a tax professional and estate attorney. Our guide to the estate tax exemption covers the related estate-tax side.
The takeaway: the step-up in basis can eliminate capital gains tax on inherited assets, so holding highly appreciated assets for heirs can be tax-smart — plan it with professional guidance.
Frequently Asked Questions
What is a step-up in basis?
A tax rule that resets the cost basis of most inherited assets to their value on the date of the original owner's death, so heirs generally owe capital gains tax only on appreciation after that date.
How does the step-up in basis save taxes?
It erases the capital gain that built up during the original owner's lifetime, so an heir who sells soon after inheriting may owe little or no capital gains tax on the asset.
Should I hold appreciated assets to pass to heirs?
It can be tax-advantageous, since the step-up eliminates lifetime gains for heirs, so holding highly appreciated assets while spending others may make sense. Plan it with a tax professional.
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