What is a step-up in basis?

A step-up in basis resets the cost basis of an inherited asset to its fair market value on the date of the original owner's death. Because capital gains tax is calculated on the difference between the sale price and the basis, this reset can erase decades of unrealized appreciation — so heirs who sell shortly after inheriting often owe little or no capital gains tax.

Which assets qualify for a step-up in basis?

Most capital assets that pass through a decedent's estate qualify — stocks, bonds, mutual funds, real estate, and business interests held in taxable accounts. Assets held in traditional IRAs, 401(k)s, and other tax-deferred retirement accounts do NOT receive a step-up, because that income was never taxed and remains taxable to the beneficiary as it's withdrawn.

Do gifts get a step-up in basis too?

No. This is the critical difference. Assets you receive as a gift during the giver's lifetime keep the giver's original cost basis — called carryover basis. Only assets transferred at death get the step-up. That's why giving away a highly appreciated asset before death can be far worse than letting it pass through the estate.

What happens to inherited assets in community property states?

In community property states, both halves of a married couple's community property can receive a full step-up when the first spouse dies — a 'double step-up' — not just the deceased spouse's half. In non-community-property states, generally only the deceased spouse's share steps up. This distinction can save a surviving spouse a large amount of capital gains tax.

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Estate Income Tax

Step-Up in Basis: How Inherited Assets Get a Fresh Cost Basis at Death

When you inherit an asset, its cost basis usually resets to fair market value at the date of death — erasing decades of unrealized gains. Here's how the step-up works, what qualifies, and why it's one of the most valuable rules in the code.

SMAART Tax Team

March 9, 2026

6 min read

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