Step-up in basis

What it means

Capital gains tax is normally charged on the growth since something was bought. When an asset is inherited, its cost basis is generally reset to its value at the date of death.

The effect is that decades of growth before the death usually disappear for tax purposes.

Why it matters

It frequently means selling an inherited asset soon after a death produces little or no capital gains tax — which is the opposite of what most families fear.

It also means an accurate date-of-death valuation is worth obtaining and keeping, even if nothing is being sold yet.

When you are likely to meet it

• When deciding whether to sell inherited shares or property.
• When an accountant asks for a date-of-death value.

How this varies by state

This is a federal rule, but community property states can treat jointly held property more favorably.

Related terms

• Alternate valuation dateAn election to value an estate six months after death instead of on the day of it.
• Annuity death benefitWhat an annuity pays when the owner dies — which depends entirely on the contract and its phase.
• AppraisalA professional opinion of what something was worth on a particular date — usually the date of death.
• Assessed valueWhat a taxing authority says a property is worth, which is rarely what it would sell for.
• Community propertyIn some states, most of what a married couple acquires during the marriage belongs to both of them equally, whatever the paperwork says.
• Date-of-death valueWhat something was worth on the day the person died. It is the number the estate, and often the tax, is measured by.
• Estate taxA tax on the value of what somebody left, paid by the estate before anything is distributed.
• Fair market valueWhat a willing buyer would pay a willing seller, neither under pressure and both knowing the facts.
• Fiduciary returnThe income tax return an estate or trust files for money it earns after the death.
• Income in respect of a decedentIncome the person had earned but not received when they died, taxed to whoever receives it.
• Inherited IRAA retirement account received from somebody who died, held under rules that differ from an account you opened yourself.
• Life estateAn arrangement where one person has the right to use property for their lifetime, and somebody else automatically owns it afterwards.
• Non-probate assetSomething that passes to a new owner automatically, without a court.
• PortabilityA surviving spouse's right to use whatever federal estate tax exclusion their spouse did not — but only if it is claimed.
• Quitclaim deedA deed transferring whatever interest the signer has, with no promise that they have any.
• Separate propertyIn a community property state, what belongs to one spouse alone — usually what they brought into the marriage, and what they inherited or were given.
• Carryover basisWhen property is given away during life, the recipient generally takes over the giver's own basis in it, rather than a fresh valuation.

Official sources

The authority this page describes, at the agency that publishes it. Sahvelo does not restate a rule from a secondary source.

• IRS — information for a deceased person (opens in a new tab)

Sahvelo guidance that uses this

• Investment accounts after a death
• Taxes after a death