The step-up in basis resets the tax basis of inherited assets to their fair market value on the owner's date of death, permanently erasing the unrealized gain that accrued during the owner's life. Heirs who sell immediately owe little or no capital gains tax, and inherited property also automatically receives long-term holding treatment. The step-up applies to appreciated stock, real estate, business interests, and crypto, but not to retirement accounts like IRAs and 401(k)s, which remain fully taxable to beneficiaries as income. Depreciated rental property gets a double benefit: the gain and all depreciation recapture vanish, and heirs restart depreciation from the stepped-up value. The rule reshapes late-life planning: highly appreciated assets are often better held until death than sold or gifted, since gifted assets carry over the old basis. Community property states offer a full step-up on both halves of marital property at the first spouse's death.
Step-Up in Basis
Primary authority: IRC §1014
The authority behind it
IRC §1014
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
A parent bought a building for $200,000 that is worth $1,400,000 at death. The heir's basis becomes $1,400,000; selling at that price triggers zero capital gains tax on $1,200,000 of lifetime appreciation and erases decades of depreciation recapture.
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