What is stepped-up basis and how does it benefit my heirs?

What the Law Says

Stepped-up basis is not directly defined in the Internal Revenue Code but arises from statutory interpretation of § 1014(a), which governs basis of property acquired from a decedent. While § 2001 imposes the federal estate tax, it does not create stepped-up basis — that authority flows from § 1014. However, § 2001 sets the estate tax framework that interacts with basis rules, especially regarding valuation dates and exemptions.

When someone inherits property (like stocks, real estate, or mutual funds), their tax basis — the amount used to calculate capital gains or losses upon sale — is generally 'stepped up' to the asset’s fair market value (FMV) on the date of the original owner’s death.

This means if the deceased bought stock for $10,000 that’s worth $100,000 at death, the heir’s basis becomes $100,000. If they sell it for $100,000, there’s no capital gain — and thus no capital gains tax.

The estate tax exemption (currently $13.61 million per person in 2024) means most estates pay no federal estate tax — but stepped-up basis still applies regardless of whether estate tax is owed.

Note: Stepped-up basis applies only to assets included in the decedent’s gross estate — typically all property owned at death, unless specifically excluded by law.

Statutory Text

A tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.

— 26 U.S.C. § 2001 — Imposition and rate of tax

What to Do

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