Step-Up in Basis at Death
When you inherit an asset — a house, a stock portfolio, a family business — the cost basis resets to the fair market value on the date of the original owner's death. This "step-up in basis" under 26 U.S.C. § 1014 means that all capital gains accumulated during the decedent's lifetime are permanently erased for tax purposes. A parent who bought a stock for $10,000 that grew to $200,000 before death creates $190,000 in unrealized gains — but heirs who inherit and immediately sell pay no capital gains tax on that appreciation. For long-held real estate and appreciated investment portfolios, the step-up is often the single largest tax benefit in an estate plan, worth more than any trust structure or gifting strategy. It is also consistently targeted for repeal or modification in Democratic budget proposals, making it one of the most politically contested provisions in the tax code.
Current Law (2026)
When a person dies, the cost basis of their assets is "stepped up" to fair market value at the date of death. Heirs who sell inherited assets owe capital gains tax only on appreciation after the death, not during the decedent's lifetime.
| Parameter | Value |
|---|---|
| Basis adjustment | FMV at date of death (or alternate valuation date, 6 months later) |
| Unrealized gains during lifetime | Permanently eliminated |
| Applies to | Stocks, real estate, business interests, collectibles, virtually all capital assets |
| Exceptions | IRAs/401(k)s (Income in Respect of Decedent — no step-up) |
Legal Authority
- 26 U.S.C. § 1014 — Basis of property acquired from a decedent
How It Works
The step-up under 26 U.S.C. § 1014 is more powerful than a deferral mechanism — it permanently eliminates unrealized capital gains rather than postponing them. A stock purchased for $10,000 that grows to $500,000 by the owner's death carries $490,000 in embedded gain that would cost $73,500–$117,000 in federal capital gains tax (15–23.8%) if sold during life. Heirs inherit the asset with a new basis equal to the fair market value at death — $500,000 in this example — and if sold immediately owe zero capital gains tax on the lifetime appreciation. Only post-death appreciation becomes taxable to heirs. This makes holding appreciated assets until death — rather than selling, gifting, or donating them — often the most tax-efficient approach for holders who don't need liquidity. See Long-Term Capital Gains for the rates that would otherwise apply.
Retirement accounts are a critical exception. Traditional IRAs, 401(k)s, 403(b)s, and other tax-deferred accounts do not receive a step-up in basis — they are classified as "income in respect of a decedent" (IRD) under § 691. Every dollar distributed from an inherited traditional IRA is taxed as ordinary income to the beneficiary, just as it would have been to the original owner. This distinction shapes asset allocation decisions in estate planning: highly appreciated brokerage accounts are ideal candidates to hold until death (the step-up eliminates the embedded gains), while traditional IRA assets generate ordinary income for heirs regardless — making them better suited for charitable bequests (qualified charities don't pay income tax) or Roth conversions during the owner's lifetime.
In the nine community property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), both halves of community property get a full step-up to fair market value at the first spouse's death — not just the deceased spouse's share. In common-law states, only the decedent's ownership interest steps up; the surviving spouse retains their original basis in their half. The dollar difference is significant: a California couple holding $2 million in community property stock originally purchased for $200,000 gets a full $2 million step-up at the first death, eliminating the capital gains tax on the surviving spouse's half that their counterpart in a common-law state would owe when selling.
Corporate buyers use a similar basis-reset mechanism in M&A: a § 338 election lets a stock purchaser treat the acquisition as an asset purchase for tax purposes, giving the buyer a stepped-up inside basis in all target assets — achieving an equivalent effect to the § 1014 step-up, but in a business acquisition context rather than at death.
For investors who have used 1031 like-kind exchanges, the step-up at death eliminates the entire accumulated deferred gain — including depreciation recapture carried from exchange to exchange. This is the core of the "swap till you drop" strategy: defer gains through serial 1031 exchanges during a real estate career, then hold until death so heirs inherit with a fully stepped-up basis that wipes all deferred recapture and capital gains permanently. The alternate valuation date election (using FMV 6 months after death rather than the date of death) is available to the executor only if both the total gross estate value and the estate tax owed are lower at the 6-month date — the election must reduce both figures, applies to all assets, and is irrevocable. It's primarily relevant for estates holding assets that declined in value after death, such as during a market downturn.
How It Affects You
If you hold long-term appreciated stocks, real estate, or a business and are thinking about selling: The step-up in basis is the single most powerful argument for not selling appreciated assets during your lifetime if you can afford to hold them. When you die, your heirs inherit those assets with a basis equal to fair market value at your death — permanently eliminating all capital gains tax on the appreciation that occurred during your life. A stock you bought for $50,000 that's worth $500,000 at death? Your heirs' basis is $500,000 — if they sell immediately, they owe zero capital gains tax on $450,000 of gain that would have cost you $67,500-$99,000 in federal taxes if you'd sold it. The practical implication: for people with large unrealized gains who don't need the cash, it often makes more financial sense to borrow against appreciated assets (securities-based loans, real estate HELOCs) rather than sell — you get liquidity without triggering capital gains, and the gain disappears at death.
If you're doing estate planning and deciding what to leave to heirs vs. spend or give away: The step-up creates a clear hierarchy of what to hold and what to consume. Leave appreciated assets to heirs — stocks, investment real estate, business interests — because the step-up eliminates the embedded capital gains at death. Spend or give away cash and low-basis bonds first — there's no step-up advantage to holding cash. Don't give appreciated assets to heirs during your lifetime — a gift transfers your (low) basis to the recipient, not the stepped-up value. If you give a child $500,000 worth of stock you bought for $50,000, they inherit your $50,000 basis and will owe capital gains tax if they sell. If instead you leave the same stock at death, they get the full $500,000 step-up. The one exception: giving appreciated assets to charity during your lifetime is generally better than leaving them at death, because you get a charitable deduction for the full fair market value plus avoid the capital gains entirely, rather than just avoiding the gains.
If you're in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA, or WI): You have access to a significant planning advantage that common-law state residents don't: the double step-up. In community property states, when one spouse dies, both halves of community property get stepped up to current fair market value — not just the deceased spouse's half. In a common-law state, only the decedent's 50% steps up; the surviving spouse keeps their original basis in their half. The difference is enormous: a California couple holding $2 million in appreciated community property stock with an original basis of $200,000 gets a full $2 million step-up on the first spouse's death — eliminating $540,000+ in potential capital gains tax (at the 23.8% federal LTCG + Medicare surcharge rate) that a Massachusetts couple in the same situation would not eliminate. If you're in a common-law state with a large, highly appreciated joint portfolio and flexibility about domicile, the community property tax advantage is worth examining carefully — some states allow community property trusts for couples who move there.
If you're monitoring the political durability of the step-up: The step-up at death has been one of the most contested provisions in Democratic tax proposals for years — Biden's budget proposals repeatedly included a plan to tax unrealized gains at death (treating death as a realization event) or to limit the step-up to a threshold amount. These proposals were politically untenable and none were enacted. The 119th Congress's reconciliation package (2025) did not touch the step-up, and the current political environment makes elimination unlikely in the near term. However, it remains a target because it costs the Treasury an estimated $50-70 billion per year in forgone capital gains revenue — one of the largest "tax expenditures" in the code. HRES 206 in the current Congress explicitly opposes any new transfer taxes that could affect the step-up. For practical planning purposes, the step-up is stable for 2026-2030, but it's worth keeping in your monitoring list if you hold very large unrealized gains.
State Variations
State capital gains taxes are also eliminated by the step-up. Community property vs. common law state distinction is the most significant variation (see above). For state-level estate taxes that may still apply, see State Estate/Inheritance Tax.
Implementing Regulations
Step-up in basis rules (IRC § 1014) are implemented through 26 CFR § 1.1014-1 through 1.1014-9 (basis of property acquired from a decedent, application to various property types, basis when property is acquired by bequest/devise/inheritance).
Pending Legislation (119th Congress)
- HRES 206 (Rep. Mann, R-KS) — Recognizing the importance of stepped-up basis in preserving family-owned farms and businesses; opposes new taxes that could raise transfer costs. Status: Introduced.
- S 2094 (Sen. Wyden, D-OR) — Basis Shifting is a Rip-off Act. Would curb related-party basis shifts in partnerships, tighten recognition rules, raise penalties to 40%, and apply to transfers after June 11, 2025. Status: Introduced.
Recent Developments
- Step-up in basis preserved in 2025 reconciliation: Proposals to eliminate or limit the step-up in basis at death (sometimes framed as taxing unrealized gains at death) appeared in Biden administration budget proposals (2021-2024) but were never enacted. The 119th Congress's reconciliation process did not include any step-up elimination. As of April 2026, the step-up remains fully intact. This is one of the most valuable provisions in the tax code for families holding long-term appreciated assets — and remains politically difficult to repeal.
- TCJA estate tax exemption through 2025 created "swap till you drop" urgency — now resolved: The TCJA (2017) doubled the federal estate tax exemption to ~$13-15 million per person. That provision was set to sunset after 2025, reverting to ~$7 million. For wealthy families with large appreciated positions and estates near the exemption threshold, the combination of a high exemption and the step-up created significant "swap till you drop" value. The One Big Beautiful Bill Act (2025) extended the elevated exemption, removing the immediate urgency — but the strategy remains valuable as a permanent planning tool.
- Community property step-up is the most underused planning tool for married couples: In the nine community property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), both halves of community property receive a step-up at the first spouse's death — not just the decedent's half. A California couple with $2 million in appreciated community property stock gets a full step-up to $2 million on the surviving spouse's death, permanently eliminating all capital gains tax. Couples in common law states with large joint portfolios should explore community property trusts or relocation to a community property state for this advantage.
- Partnership basis shifting under IRS scrutiny: The IRS has increased enforcement on related-party "basis shifting" transactions in partnerships — where partners structure transactions to inflate the tax basis of assets inside a partnership without economic substance. This is distinct from the step-up at death, but both involve basis manipulation. IRS Notice 2023-54 designated certain partnership basis shifting transactions as "listed transactions" requiring disclosure. S. 2094 (119th Congress) would codify restrictions. For ordinary investors, this isn't directly relevant — but family partnerships and private equity structures should be carefully reviewed.