taxes

step-up in basis

A tax provision that resets the cost basis of inherited assets to their fair market value at the date of the original owner's death, eliminating capital gains taxes on appreciation during the deceased's lifetime.

Example

“The stock bought for $10,000 was worth $200,000 at death. The heir received a step-up in basis to $200,000, owing no tax on the $190,000 of gains.”

Memory Tip

STEP-UP in basis = inherited assets get their cost basis STEPPED UP to current value. Erases the gain.

Why It Matters

Step-up in basis is one of the most significant tax advantages available to heirs because it can save families hundreds of thousands or even millions of dollars in capital gains taxes. Understanding this provision helps individuals and families plan their estates more effectively and recognize the true value of inherited assets.

Common Misconception

Many people mistakenly believe that step-up in basis applies to all inherited assets, but it typically does not apply to certain retirement accounts like IRAs and 401(k)s, which still carry income tax obligations when withdrawn by heirs. Additionally, some assume the step-up eliminates all taxes on inherited property, when it specifically addresses only capital gains taxes on appreciation.

In Practice

If someone purchases a stock for 10000 dollars and it grows to 50000 dollars before they pass away, their heirs would normally owe capital gains taxes on the 40000 dollar gain. With step-up in basis, the heirs receive the stock with a new cost basis of 50000 dollars, so if they immediately sell it, they owe zero capital gains taxes on that inherited appreciation.

Etymology

Plain English: the cost BASIS is 'stepped UP' to current market value upon inheritance.

Common Misspellings

step up in basisstep-up-in-basisstepup in basis

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