Step-Up in Basis Explained: Why Inherited Stock Is Worth More Than You Think
You inherit $100,000 worth of your parent's stock. Your parent bought it 20 years ago for $12,000. You do not owe a penny in capital gains tax on that $88,000 gain. Not today. Not ever. Not unless you sell it for more than $100,000.
This is the step-up in basis. It is one of the most valuable tax provisions in the entire US tax code. And most people do not understand it exists until they inherit something.
Here is what happens: When your parent dies, the IRS resets the tax cost basis of every asset they owned to its fair market value on the date of death. All the gains that accumulated during their lifetime vanish from a tax perspective. You inherit the asset at its current market value, not at what your parent originally paid.
This is not a loophole. It is not aggressive tax planning. It is IRC Section 1014, Basis of Property Acquired from a Decedent. It applies to nearly all inherited assets: stocks, bonds, real estate, mutual funds, business interests, collectibles. The only major exceptions are IRAs and retirement accounts, which have their own rules.
If you inherited anything within the last 90 days, this article will show you how much this rule is actually worth and what you need to do to protect it.
How the step-up in basis works
Your parent bought Apple stock in 1995 for $12,000. Over 25 years, it grew to $500,000. Your parent never sold it.
If your parent had sold it during their lifetime, they would owe federal long-term capital gains tax on the $488,000 gain. Depending on their income, that would be roughly $73,000 to $97,000 in federal taxes (at 15% or 20% federal long-term capital gains rates under IRC Section 1(h)), plus state income taxes.
But your parent did not sell. They died. And under IRC Section 1014(a), the basis of the inherited stock is reset to its fair market value on the date of death: $500,000.
You inherit the stock. Your cost basis is $500,000. If you sell it the next day for $500,000, you owe zero capital gains tax. The $488,000 gain is completely erased from a tax perspective.
This is the step-up. It is automatic. You do not need to file anything. You do not need the estate to have enough assets to require an estate tax return under IRC Section 706. The step-up applies to every inherited asset, regardless of the size of the estate.
The step-up in basis applies to property included in the decedent's gross estate regardless of whether the estate owes any federal estate tax. For 2026, federal estate tax only applies to estates exceeding $15 million per person, but the step-up in basis applies to everyone. LegalClarity
The numbers that matter for 2026
To understand what the step-up in basis is actually worth, you need to know the 2026 capital gains tax rates.
For 2026, a single filer will not pay any tax on long-term capital gains if their total taxable income is $49,450 or below. An individual filer with income between $49,451 and $545,500 will pay a 15% long-term capital gains tax rate. Above $545,500, they will pay 20%. Bankrate
For married couples filing jointly, the 0% rate threshold increases to $98,900 in 2026, and the 15% bracket extends up to $613,700. Kiplinger
Long-term capital gains apply to inherited property automatically, even if you sell it days after the death, because inherited property is automatically treated as held for more than one year under IRC Section 1223, even if you sell it the day after the decedent's death. LegalClarity
This matters enormously. If you inherited appreciated stock and sell it quickly, you get the preferential long-term capital gains rates (0%, 15%, or 20%), not the ordinary income rates (10% to 37%).
A real example: The $500,000 inheritance
Your parent dies and leaves you inherited stock worth $500,000. Your parent originally paid $412,000 for it. That $88,000 gain has never been taxed.
Without the step-up in basis, here is what would happen:
- You inherit the stock with a basis of $412,000 (your parent's original cost)
- You sell it for $500,000
- Your taxable gain is $88,000
- At a 15% federal capital gains rate, you owe $13,200 in federal taxes
- Plus state taxes (varies by state, but average 5 to 10%): roughly $4,400 to $8,800
- Total tax bill: $17,600 to $22,000
With the step-up in basis under IRC Section 1014:
- You inherit the stock with a basis of $500,000 (the fair market value on the date of death)
- You sell it for $500,000
- Your taxable gain is $0
- You owe $0 in taxes
The difference: you keep $17,600 to $22,000 that should otherwise go to the IRS.
But here is the really important part: that is just if you sell immediately. The step-up is most valuable when the asset appreciates after you inherit it.
The power of the step-up: Long-term wealth transfer
Let's say you inherit that $500,000 in Apple stock. You hold it. Over the next five years, it grows to $750,000.
You sell it for $750,000. Your taxable gain is $250,000 (your stepped-up basis of $500,000 minus the $750,000 sale price).
At 15% federal capital gains rates, you owe $37,500 in federal taxes. You keep $712,500.
Here is what would have happened without the step-up in basis:
- You would inherit with a basis of $412,000
- You would sell for $750,000
- Your taxable gain would be $338,000
- Your federal tax bill would be $50,700
- You would keep only $699,300
The step-up saved you $13,200 in taxes. That is money that stays in your family instead of going to the government.
This is why the step-up in basis is often called one of the best tax breaks for the wealthy. It is not available to people who gift appreciated assets to their children during their lifetime. Those assets retain the donor's original cost basis under IRC Section 1015 (carryover basis for gifts). But inherited assets get the reset to current market value.
The IRS estimates that stepped-up basis costs the federal government roughly $72.5 billion per year in forgone tax revenue.
The step-down: When inherited assets are worth less
The step-up in basis is not always an advantage. If your parent's assets declined in value, the step-up becomes a step-down, and you lose the ability to claim the loss.
Your parent bought stock for $500,000. Over the years, it declined to $300,000. Your parent never sold it because they did not want to lock in the loss.
If your parent had sold it during their lifetime, they could have claimed a $200,000 capital loss under IRC Section 165. They could have deducted up to $3,000 of that loss per year against their ordinary income, with the remainder carried forward indefinitely.
But your parent did not sell. They died. And under IRC Section 1014(a), your inherited basis is reset to $300,000 (the fair market value on the date of death).
The $200,000 loss is gone forever. You cannot claim it. The tax benefit of that loss dies with your parent.
If you sell the inherited stock for $300,000, you owe zero capital gains tax. But you also cannot claim the $200,000 loss that your parent could have claimed if they had sold it themselves.
This is the downside of the step-up in basis. It cuts both ways. Assets that appreciated get a huge tax benefit. Assets that declined in value lose the benefit of the loss.
The lesson: if your parent owns significantly depreciated assets when they die, it would have been better (from a tax perspective) for them to sell those assets and claim the loss during their lifetime. The loss is more valuable to them than the step-down is to you.
What kills the step-up in basis
The step-up in basis is not automatic protection. It can be lost or reduced if certain things happen.
First, do not inherit IRAs or 401(k)s expecting a step-up in basis. They do not get one. Inherited retirement accounts are subject to the 10-year distribution rule under IRC Section 401(a)(9)(H) (added by SECURE Act 2.0) and are taxed as ordinary income when distributed.
Second, if you inherited property and your parent's estate was large enough to require a federal estate tax return (Form 706, required for estates exceeding $15 million per person in 2026), the executor must report the value of each asset on that return. Under IRC Section 1014(f), you must use that reported value as your basis, not a higher estimate. If you claim a basis higher than the value reported on the estate return, you face a 20% accuracy-related penalty.
Third, if you inherited a rental property, the depreciation you personally claim after you inherit it reduces your basis and is subject to 25% recapture tax when you sell, even if your capital gains rate is lower.
Fourth, if the property is in a community property state and you are the surviving spouse, you get special treatment. Under IRC Section 1014(b)(6), both halves of community property receive a step-up in basis when the first spouse dies, not just the deceased spouse's half. This doubles the step-up benefit and can eliminate huge tax bills for surviving spouses in California, Texas, and other community property states.
What to do right now
If you inherited appreciated stock, real estate, a business, or any other non-retirement asset within the last 90 days, here is your action plan:
First, get a professional appraisal of the property on the date of death. This establishes your stepped-up basis in writing. Document it. If the property is in an estate subject to Form 706, the executor should report the appraised value on that return, and you use that as your basis.
Second, understand that you can hold the asset indefinitely and the step-up protection never expires. The longer you hold it, the more appreciation you can add on top of your stepped-up basis without owing taxes on your parent's lifetime gains.
Third, if you plan to sell inherited stock within a few months, you likely owe zero capital gains tax because the stock has not appreciated since you inherited it. Do not delay the sale expecting taxes to be lower later. The tax advantage is maximized right at inheritance.
Fourth, if you plan to hold inherited real estate and rent it out, understand that depreciation deductions you claim will reduce your basis and create recapture tax when you sell. Consult a CPA to understand the full tax implications before committing to a rental strategy.
Fifth, if you are a surviving spouse in a community property state and inherited significant appreciated assets, consult a tax advisor immediately. The step-up basis rules are more favorable for you than for other heirs, and you should structure any sales or distributions to take maximum advantage.
The step-up is not guaranteed forever
There is ongoing political debate about whether stepped-up basis should be eliminated or restricted. Several proposals would require heirs to "step up" and report the value of inherited assets on their tax returns, or would calculate capital gains taxes as if the deceased had sold the assets at death.
For now, under current law, IRC Section 1014 provides the full step-up in basis for all inherited assets (except retirement accounts). If you inherited property, take advantage of this rule while it exists.
About the author
Kurt Altrichter, CRPS, is the founder and Chief Investment Officer of Ivory Hill, LLC, a fee-only fiduciary registered investment advisory firm based in Edina, Minnesota. He specializes in wealth management for business owners and high-net-worth individuals navigating major financial transitions including inheritance, business sales, and retirement plan design. Kurt is an Investment Adviser Representative under Life Inc. Retirement Services.
To discuss your inheritance or wealth planning situation, contact Kurt at kurt@ivoryhill.com or visit ivoryhill.com.
Apply to work with Kurt: https://calendly.com/ivoryhill/discovery
Disclosure
The information provided in this article is for educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws and inheritance rules are complex and depend on individual circumstances. Consult with a qualified financial advisor, CPA, and estate attorney before making decisions involving inherited assets. Ivory Hill, LLC is a registered investment adviser. Investment Adviser Representative services offered through Life Inc. Retirement Services.
Last verified: May 5, 2026 against IRC Section 1014 (Basis of Property Acquired from a Decedent), IRC Section 1(h) (Capital Gains Tax Rates), IRC Section 401(a)(9)(H) (SECURE Act 2.0 Inherited IRA 10-Year Rule), IRS Revenue Procedure 2025-32 (2026 Tax Brackets and Adjusted Items), IRS Publication 551 (Basis of Assets)
