stepped up basis
The adjustment of an inherited asset's cost basis to its fair market value at the date of inheritance — eliminates capital gains on appreciation during the deceased's lifetime.
Example
“The stepped up basis on her inherited stock eliminated $80,000 in capital gains she would have owed.”
Memory Tip
STEPPED UP — inherited assets get a fresh cost basis. Major tax benefit of inheritance.
Why It Matters
A stepped up basis can save heirs thousands or even millions of dollars in capital gains taxes when they eventually sell inherited assets. This tax benefit makes a significant difference in how much wealth is actually transferred to the next generation, which is why understanding it is crucial for estate planning and wealth preservation decisions.
Common Misconception
Many people mistakenly believe that heirs must pay capital gains taxes on the appreciation that occurred during the deceased person's lifetime. In reality, the stepped up basis completely eliminates those taxes, so heirs only owe taxes on any gains that occur after they inherit the asset.
In Practice
Suppose a parent purchased stock for $50,000 that grew to $200,000 by the time they passed away. Without a stepped up basis, an heir selling immediately would owe capital gains tax on the $150,000 gain. With a stepped up basis, the heir's cost basis becomes $200,000, so they owe zero capital gains tax if they sell at that price, saving them potentially $22,500 or more in taxes depending on their tax bracket.
Etymology
IRS provision for inherited assets — the basis steps up to current value.
Common Misspellings
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