Step-Up in Basis, Explained: Why Inherited Assets Sell Nearly Tax-Free

What Exactly Is a Step-Up in Basis?

Cost basis is the number the IRS subtracts from your sale price to figure your taxable gain. Under Internal Revenue Code Section 1014, an inherited asset generally takes a new basis equal to its fair market value on the date of death, rather than the price the original owner paid. The estate can sometimes elect an alternate valuation date six months after death instead.

Here's how it works in practice. Suppose your mother bought stock for $20,000 that was worth $180,000 when she died. Your basis is $180,000. If you sell for $185,000, you are taxed on a $5,000 gain, not a $165,000 gain. The decades of growth during her life are never taxed as capital gain to anyone.

One more quiet benefit: inherited capital assets automatically receive long-term capital gains treatment, even if you sell the week you receive them.

The Double Step-Up in Community Property States

In community property states such as Texas, the rule goes further. When one spouse dies, both halves of the couple's community property generally receive a full step-up under Section 1014(b)(6), not just the deceased spouse's half.

That means a surviving spouse in Texas can often sell the family home or a long-held stock position with little or no taxable gain. In other states, how much of a jointly owned asset adjusts depends on how the asset is titled and on state law, so check before assuming.

What Does Not Get a Step-Up

The step-up is generous, but it has clear boundaries. These categories keep their old tax treatment:

• Pre-tax retirement accounts, such as traditional IRAs and 401(k)s: withdrawals are ordinary taxable income to the beneficiary, regardless of the account's date-of-death value.
• The income portion of annuities and other income in respect of a decedent, which is income the person earned but had not yet been taxed on.
• Gifts made during life: a gifted asset carries over the giver's original basis instead of resetting at fair market value.

A gift during life carries the old basis with it. An inheritance leaves the old basis behind.

Why Documenting Date-of-Death Values Matters

The step-up is only as good as your proof of the date-of-death value. For real estate, that usually means a professional appraisal dated as close to the date of death as practical. For brokerage and investment accounts, save statements or valuation snapshots that show holdings and prices on that date.

Any growth after death is taxable when you sell, at long-term capital gains rates. For 2026, the federal rate is 0% up to $49,450 of taxable income for single filers ($98,900 married filing jointly), 15% up to $545,500 ($613,700 joint), and 20% above that. A 3.8% net investment income tax can also apply above $200,000 of modified adjusted gross income for single filers ($250,000 joint).

Sell soon after death and there is often little post-death gain to tax. Hold for years and the appraisal you filed away becomes the document that keeps the taxable gain honest.

Common Misconceptions

“I'll owe tax on the whole sale price of Mom's house.” False. You owe capital gains tax only on the gain above your stepped-up basis. If the house was worth $300,000 at death and sells for $305,000 a few months later, the taxable gain is $5,000, minus selling costs.

“Gifting the house to the kids before death saves taxes.” Often the opposite. A lifetime gift carries over the parent's original basis, so the children inherit the entire built-in gain. Keeping the house until death usually erases that gain through the step-up. There can be non-tax reasons to transfer property during life, but capital gains savings is rarely one of them.

“Inherited stock held under a year gets short-term rates.” False. Inherited capital assets are automatically treated as long-term, no matter how quickly you sell.

How Legacywyse Can Help

Capturing date-of-death values is estate work, and it is easiest while the estate is being settled rather than years later at tax time. Legacywyse helps executors and families build an estate inventory with values, photos, and supporting documents in one workspace, alongside the probate checklist and family review.

Record the values once, and the appraisal question answers itself when someone eventually sells.