This article explains general tax rules and is not individualized tax or legal advice; all figures reflect the 2026 tax year unless a different year is labeled inline. Confirm your situation with a licensed CPA or estate attorney before acting.
TL;DR — Quick Verdict
- Step-up in basis under IRC Section 1014 resets an inherited asset’s cost basis to its fair market value on the owner’s date of death, erasing capital gains that built up during the decedent’s lifetime.
- On a home bought for $150,000 and worth $650,000 at death, the step-up wipes out roughly $500,000 of taxable gain — a federal tax saving of about $75,000 at the 15% long-term capital gains rate.
- Traditional IRAs and 401(k)s get no step-up: they are “income in respect of a decedent” and remain fully taxable to heirs.
- Inheriting appreciated stock beats receiving it as a lifetime gift for tax purposes — the gift carries the giver’s original low basis, while the inheritance resets it.
- With the 2026 federal estate tax exemption at $15,000,000 per person, almost every heir keeps the step-up with zero estate tax owed. Verify which assets qualify before you sell anything.
A family home purchased for $150,000 in 1985 can easily be worth $650,000 today. Sell it during the owner’s lifetime and the $500,000 gain is taxable. Inherit it instead, and under Internal Revenue Code Section 1014 that gain can vanish entirely. The mechanism is called a step-up in basis, and it is one of the most valuable — and misunderstood — provisions in the U.S. tax code.
The Office of the Law Revision Counsel codifies the rule at 26 U.S.C. 1014: property acquired from a decedent generally takes a new basis equal to its fair market value at the date of death. This guide shows exactly how much the step-up saves, which assets qualify and which are excluded, how it compares with receiving a lifetime gift, and the errors that cost heirs thousands. Custodians such as Fidelity and Charles Schwab will reset basis on inherited brokerage accounts, but only if you document the date-of-death value correctly — a step many heirs skip.
What the Step-Up Actually Saves: The Numbers
Basis is your cost for tax purposes. Capital gains tax applies to the difference between your sale price and your basis. When you inherit, Section 1014 replaces the decedent’s original basis with the fair market value at death — so appreciation during their lifetime is never taxed to anyone.
Consider three common inherited assets and the gain each carries. The federal long-term capital gains rate for most middle- and upper-middle-income heirs is 15%, per IRS Revenue Procedure 2025-32.
Author calculations applying the 2026 long-term capital gains rate structure. Rate source: IRS Revenue Procedure 2025-32 (verify at irs.gov). Figures are illustrative scenarios, not provider-specific quotes.
A single filer earning $200,000 or more would face the 20% rate on top gains and potentially the 3.8% Net Investment Income Tax, pushing the saved amount higher still. Heirs weighing a sale should first check how their income places them across the capital gains rates by holding period and income, because the rate applied to any gain above the stepped-up basis depends entirely on that placement.
How the Basis Reset Works Step by Step
Picture Maria, whose father dies in March 2026 owning a brokerage account he opened in 1998. He invested $40,000; the account is worth $220,000 on his date of death. Under Section 1014(a), Maria’s basis becomes $220,000 — not her father’s $40,000.
If Maria sells the following week for $222,000, her taxable gain is $2,000, not $182,000. At the 15% rate that is $300 in federal tax instead of roughly $27,300. The reset also converts the holding period: inherited assets are automatically treated as long-term regardless of how long Maria personally holds them, so she never risks the higher short-term rate.
Two wrinkles matter. First, an executor may elect the “alternate valuation date” — six months after death — but only if it lowers both the gross estate and the estate tax; if markets fell in that window, the lower value becomes the heir’s basis and can enlarge a future gain. Second, the reset works downward too. An asset that lost value produces a “step-down,” locking in a lower basis. Heirs planning to sell some holdings and hold others should weigh this against a broader asset location strategy across account types so the right assets sit in the right places before any sale.
Which Assets Qualify — and Which Get Nothing
Not everything inherited receives a step-up. The single most expensive misunderstanding involves retirement accounts. Under Section 1014(c), assets classified as “income in respect of a decedent” (IRD) are excluded entirely because the money was never taxed during the owner’s life.
Classifications per 26 U.S.C. 1014 and IRS Revenue Ruling 2023-2, Office of the Law Revision Counsel and Internal Revenue Service (verify at uscode.house.gov).
The community property rule is a quiet windfall. In states like California and Texas, when the first spouse dies, both halves of jointly held community property step up — not just the deceased spouse’s half. A surviving spouse in a common-law state gets a step-up on only the decedent’s share. Couples holding a highly appreciated business or property should read this alongside the available estate tax planning tools, costs, and savings, because titling decisions made years earlier drive the outcome.
Inheriting vs. Gifting: Which Is Better for Appreciated Assets?
Parents often ask whether to gift appreciated stock now or leave it in the estate. The tax treatment diverges sharply. A lifetime gift is a “carryover basis” transfer: the recipient inherits the giver’s original basis and the built-in gain. An inheritance triggers the Section 1014 reset.
Take $300,000 of stock with a $10,000 original basis. Gift it, and the child who later sells owes tax on a $290,000 gain — roughly $43,500 at 15%. Leave it in the estate, and the child’s basis becomes $300,000; selling near that value produces almost no tax. The gift path costs the family about $43,500 more.
Gifting still wins in specific cases: assets expected to appreciate dramatically (removing future growth from a taxable estate), or when the giver’s estate approaches the exemption ceiling. Families exploring lifetime transfers should compare this with a GRAT setup costs and tax savings for large estates and, for charitable goals, a charitable remainder trust costs and benefits. One trap to avoid: Section 1014(e) denies the step-up if you gift appreciated property to someone who dies within a year and it returns to you — a loophole Congress closed in 1981.
Verdict
For already-appreciated assets a family expects to sell, inheriting beats gifting almost every time — the step-up erases the entire built-in gain, while a gift preserves it. Reserve lifetime gifting for assets poised for large future growth or for estates likely to exceed the $15,000,000 exemption, where removing appreciation matters more than the lost step-up.
What Most People Get Wrong
The step-up is automatic in theory but easy to fumble in practice. These four mistakes recur most often.
Failing to document the date-of-death value. The consequence is a disputed basis and a larger taxable gain if the IRS challenges it. The fix: obtain a formal appraisal for real estate and a custodian statement for securities showing fair market value on the exact date of death, then keep it permanently.
Assuming IRAs step up. Heirs sometimes sell taxable investments to preserve an inherited IRA, believing both reset. They do not. The correct action is to treat the inherited traditional IRA as fully taxable ordinary income on withdrawal and plan distributions accordingly, ideally coordinating with a Roth conversion effects on Medicare premiums analysis for the surviving spouse.
Ignoring the net investment income tax. A large sale can push a high earner over the $200,000 single / $250,000 married MAGI threshold, adding the 3.8% surtax on top of the capital gains rate. Model the full bill using the NIIT surtax rules and avoidance strategies before selling in one lump. Spreading a sale across tax years can keep more gain in a lower band and is worth pairing with tax-loss harvesting mechanics and real savings.
Selling too fast without checking the rate band. An heir with modest income may qualify for the 0% long-term rate on part of any gain above the stepped-up basis. Selling everything at once can waste that band. Compare treatment against ordinary income using the distinction between investment vs earned income tax treatment.
Is Careful Step-Up Planning Worth It for You?
The answer depends on scale and asset mix. Run through the conditional logic below.
If you expect to inherit — or leave — appreciated real estate or a taxable brokerage account worth six figures or more, documenting basis and timing sales is unambiguously worth the effort; the savings run into tens of thousands of dollars. A heir inheriting a $650,000 home saves roughly $75,000 by relying on the reset rather than the decedent’s basis.
If the bulk of the inheritance sits in traditional retirement accounts, step-up planning matters less because those assets never qualify; the focus shifts to distribution timing and bracket management. And if your estate approaches $15,000,000 per person, the calculus flips toward removing growth through gifting or trusts, where the lost step-up is a price worth paying to dodge the 40% estate tax. High earners layering multiple strategies should also review a donor-advised fund costs and tax benefits comparison, since charitable timing interacts with realized gains.
For most families, the honest takeaway is simple: the step-up is generous, it is automatic for capital assets, and the money is lost only through avoidable paperwork errors or premature sales.
Frequently Asked Questions
Do I owe estate tax if I inherit appreciated assets in 2026?
Almost certainly not. The federal estate tax exemption is $15,000,000 per person for 2026 under the One Big Beautiful Bill Act (Public Law 119-21), confirmed by IRS Revenue Procedure 2025-32. Only estates exceeding that amount owe federal estate tax, at a top rate of 40%. The step-up in basis applies regardless of estate size, though 18 states also levy their own estate or inheritance taxes at lower thresholds.
Does an inherited IRA get a step-up in basis?
No. Traditional IRAs and 401(k)s are “income in respect of a decedent” under Section 1014(c) and are explicitly excluded. Withdrawals are taxed as ordinary income to the heir at rates up to 37% in 2026. Roth IRAs differ: qualified distributions are tax-free, but the account still receives no basis step-up because none is needed.
What happens if I inherit an asset that lost value?
Section 1014 works in both directions. If the asset’s fair market value at death is below the decedent’s original basis, your basis “steps down” to that lower value. You lose the ability to claim the built-in loss. In that situation, some families consider whether the original owner should sell before death to harvest the loss, though this requires careful timing and professional advice.
How do I prove the date-of-death value to the IRS?
For real estate, obtain a qualified appraisal dated to the death. For publicly traded securities, use the average of the high and low trading price on the date of death, which brokerages such as Fidelity and Schwab typically calculate on request. Keep this documentation permanently — it establishes your basis and protects against a larger taxable gain if the IRS ever questions the figure.
How We Researched This Article
This analysis draws on primary federal sources. The mechanics of the basis reset come directly from the statutory text of 26 U.S.C. 1014 as maintained by the Office of the Law Revision Counsel, including the community property provision at 1014(b)(6), the income-in-respect-of-a-decedent exclusion at 1014(c), and the one-year anti-abuse rule at 1014(e). The treatment of irrevocable grantor trust assets reflects IRS Revenue Ruling 2023-2.
Tax rate figures were verified against IRS Revenue Procedure 2025-32, which sets the 2026 long-term capital gains thresholds (0%, 15%, and 20%) and confirmed the $15,000,000 estate tax exemption established by the One Big Beautiful Bill Act. The 3.8% Net Investment Income Tax thresholds derive from IRC Section 1411, which is not indexed for inflation. Additional statutory context was drawn from the U.S. Code and cross-checked against IRS guidance published at the Internal Revenue Service.
The dollar savings shown are original author calculations that apply the verified 2026 rate structure to illustrative asset values; they are modeled scenarios, not measured provider quotes, and individual results vary by income, filing status, and state. State-level estate and inheritance taxes were noted but not modeled in full, as they vary across the 18 jurisdictions that impose them. This research was last conducted July 2026. All figures were verified against named primary sources before publication.