The Step-Up in Basis at Death: What Heirs Should Know

When most people think about leaving an inheritance, they focus on how much they will leave behind. In reality, what assets you leave behind can be just as important as the dollar amount itself.

One of the most valuable tax benefits available to heirs is called the step-up in basis (sometimes called the step-up in cost basis). Yet many families have never heard of it until after a loved one passes away.

Understanding how the step-up in basis works can help you make better decisions about investing, estate planning, and ultimately maximizing what your heirs receive.

The step-up in basis at death generally resets the tax basis of inherited capital assets, such as stocks and real estate, to their fair market value on the date of death. Heirs may owe little or no capital gains tax on growth that occurred before then. Traditional IRAs and 401(k)s generally do not receive a step-up.

Key takeaways

• A step-up in basis adjusts the tax basis of certain inherited assets to their fair market value at the owner's death, potentially eliminating decades of unrealized capital gains.
• Taxable investment accounts, real estate, and business interests generally receive a step-up in basis, while traditional retirement accounts like IRAs and 401(k)s generally do not.
• The same dollar value in a taxable brokerage account versus a traditional IRA can produce very different after-tax outcomes for heirs.
• Directing charitable gifts from pre-tax retirement accounts while leaving stepped-up assets to family may improve the overall tax outcome for both.
• Understanding which assets receive a step-up can help families make more informed legacy planning decisions.

What is a step-up in basis at death (and which assets get one)?

In simple terms, a step-up in basis adjusts the tax basis of certain assets to their fair market value on the date of the owner's death.

The IRS generally provides that inherited property receives a basis equal to its fair market value at death (or an alternate valuation date if properly elected by the estate).

Let's look at a simple example:

Your mother bought shares of stock for $50,000. At her death, those shares are worth $300,000. You inherit the stock. Your new tax basis is generally $300,000.

If you immediately sell the stock for $300,000, there may be little or no capital gains tax due because the appreciation that occurred during your mother's lifetime essentially disappears for income tax purposes.

This may represent meaningful tax savings for some heirs, though the result depends on individual circumstances, the asset, and state law.

The step-up generally applies to assets that would otherwise generate capital gains when sold, including:

Taxable investment accounts: Individual stocks, exchange-traded funds (ETFs), mutual funds, bonds, and other securities held outside retirement accounts. If these investments appreciated significantly during the owner's lifetime, heirs may avoid capital gains taxes on decades of growth.

Real estate: A step-up in basis on inherited property, including a family home or rental property, often provides some of the largest benefits. Imagine a couple purchased a home decades ago for $100,000 that is worth $700,000 today. If heirs inherit the property after their passing, the basis may be adjusted to its fair market value at death, potentially eliminating hundreds of thousands of dollars of embedded capital gains.

Business interests: Closely held businesses, family businesses, partnership interests, and shares of private companies may also receive a stepped-up basis when inherited. For families that spent decades building a successful business, this can substantially reduce future capital gains taxes if the business is eventually sold.

What does not receive a step-up in basis (and why it matters for heirs)

This is where many families are surprised.

Certain inherited assets are classified as Income in Respect of a Decedent (IRD) and generally do not receive a basis adjustment at death. Examples include:

• Traditional IRAs
• Traditional 401(k) plans
• 403(b) accounts
• Pension benefits
• Non-qualified annuities
• Deferred compensation plans

These assets have generally not been taxed as ordinary income, so the government still expects its share when the money is eventually distributed.

To be clear, traditional retirement accounts are powerful wealth-building tools. They often provide upfront tax deductions, tax-deferred growth, and decades of compounded returns. For retirement savings, that is hard to beat.

However, from an inheritance perspective, they can be among the least tax-efficient assets for many heirs. Consider two assets worth $500,000:

Asset 1, a traditional IRA: Your heirs inherit a $500,000 traditional IRA. Under current rules, many non-spouse beneficiaries must distribute the account within 10 years. Every dollar withdrawn is generally taxable as ordinary income. Depending on the heir's tax bracket, a significant portion may ultimately go to federal and state income taxes.

Asset 2, a taxable brokerage account: Your heirs inherit a taxable brokerage account worth $500,000 containing highly appreciated investments. The account generally receives a step-up in basis at death. If sold immediately, there may be little or no capital gains tax due.

Same account value, potentially very different after-tax outcome.

Assets that may be more favorable for heirs

When the goal is maximizing after-tax wealth transferred to children or grandchildren, certain assets can be especially attractive.

Taxable investments with appreciated gains: Because of the step-up in basis, heirs may receive the asset with little or no embedded capital gains tax liability. You can read more about this in our related article on taxable investment accounts.

Roth retirement accounts: Roth IRAs generally offer tax-free qualified distributions to beneficiaries. Although inherited Roth accounts are often subject to distribution timing requirements, the distributions themselves are generally not taxable if Roth rules have been satisfied. Learn more in our guide to Roth accounts and tax-free growth.

Life insurance proceeds: Life insurance death benefits are generally received income-tax free by beneficiaries. This makes life insurance one of the more tax-efficient assets that can be transferred to heirs.

For a broader overview, see our article on three tax-efficient ways to pass on money to your heirs or visit our estate planning services page.

Watch: Three Tax-Efficient Ways to Pass On Money to Your Heirs

How does the step-up apply to a surviving spouse and jointly held property?

Married couples often hold a home or brokerage account jointly, and the basis rules depend on how the property is titled and where the couple lives. The IRS explains the main patterns in Publication 551.

Qualified joint interests. When married spouses hold property as tenants by the entirety, or as joint tenants with right of survivorship where the spouses are the only joint tenants, the IRS generally treats one-half of the property as included in the first spouse's estate. The surviving spouse generally keeps the cost basis in their own half and receives a stepped-up basis only in the half that was inherited.

Hypothetical example: A couple bought a home for $200,000 and it is worth $600,000 when the first spouse dies. For illustration, and ignoring improvements and depreciation, the surviving spouse's basis may be about $400,000: $100,000 for their own half plus $300,000 for the inherited half at fair market value. Hypothetical example for illustration only. Results are not guaranteed.

Community property states. In community property states (the IRS lists Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), the full value of community property may become the new basis when one spouse dies, including the surviving spouse's half, if at least half of its value is includible in the decedent's gross estate. Michigan is not on that list, so the half-step-up pattern for joint property is more common for Michigan couples.

Other joint owners. If joint owners are not spouses, such as siblings or a parent and adult child, the result can depend on how much each person contributed and how the property is titled, so the answer may differ from the spouse rules above.

Retirement accounts follow separate rules. If you are a surviving spouse who inherited an IRA, see our guide to RMD rules when inheriting an IRA as a spouse.

What is the difference between inherited and gifted property?

The timing of a transfer can change the tax result. Property received at death and property received as a gift during the owner's life are generally treated differently.

• Inherited property: Your basis is generally the fair market value on the date of death, or on the alternate valuation date if the estate chooses it. This is the step-up.
• Gifted property: Your basis generally carries over from the donor, which is why it is called a carryover basis. If the donor's adjusted basis was low, a later sale may produce a large taxable gain. A different rule can apply if the property was worth less than the donor's basis when given, and any gift tax paid may adjust the basis in some cases.

Hypothetical example: A parent bought stock for $50,000, and it is worth $300,000. If the parent gives it to you during life, your basis is generally $50,000, so selling for $300,000 could produce a $250,000 gain. If you instead inherit the stock, your basis is generally $300,000. Hypothetical example for illustration only. Results are not guaranteed.

One caution: the IRS notes the step-up rule generally does not apply to appreciated property that you or your spouse gave to someone within one year before that person died. In that case the property generally keeps the decedent's adjusted basis rather than its value at death.

This comparison is not a recommendation to hold or give away any asset. Gift tax, estate tax, control, family goals, and state law can matter as much as basis, so consider reviewing these decisions with a qualified tax professional and an estate planning attorney. If you have recently received assets, our 12-step inherited money checklist can help you organize what to review first.

Source: IRS, Publication 551, Basis of Assets (revised December 2025), sections on inherited property, community property, qualified joint interests, and property received as a gift, reviewed as of October 13, 2026. Rules can change and depend on individual facts. This section is educational and is not personalized tax or legal advice.

A charitable planning opportunity

If charitable giving is important to you, there is a strategy many people overlook.

Rather than leaving highly appreciated taxable assets to charity, it may be more efficient to designate the charity as a beneficiary of all or part of a traditional IRA or other pre-tax retirement account.

Why? Because qualified charities generally do not pay income tax when receiving inherited IRA assets. This means:

The charity receives the full value of the retirement account. No income tax is due on the distribution. Family members can instead inherit assets that may receive a step-up in basis, Roth assets, or life insurance proceeds.

In many situations, this creates a better tax outcome for both the family and the charitable organization.

Example: Suppose your estate consists of a $500,000 traditional IRA and a $500,000 taxable brokerage account with large unrealized gains. If your church is receiving $250,000 and your children are receiving the remainder, it may be more tax-efficient to direct the charitable gift from the IRA. The church receives the funds tax-free, while your children inherit more of the taxable investment account that may receive a step-up in basis. The overall family and charitable outcome can be significantly improved.

Retirement Tax Review

The step-up in basis is one of several factors that can shape how much of an estate ultimately reaches your heirs after taxes. A Retirement Tax Review can help you look at which of your accounts may receive a step-up, which will not, and how your beneficiary designations line up with your broader goals.

We also work with families who have recently inherited assets and are trying to sort through their options, as this kind of planning connects closely with retirement planning more broadly. Results will vary by individual and depend on your complete financial picture, and we make no guarantees of any specific outcome or tax savings.

Schedule a Retirement Tax Review with our team to talk through your situation.

Important Considerations

Tax laws are subject to change, and the rules described in this article reflect current federal tax law as of the date of publication. Individual circumstances vary, and exceptions exist based on factors such as community property rules, estate tax elections, trust structures, state law variations, and specific beneficiary situations.

Before implementing any strategy discussed here, consult with a qualified tax advisor or estate planning attorney to understand how these rules apply to your specific situation.

Frequently asked questions