Step-Up in Basis: How It Works and Why It Matters for Your Estate

Step-up in basis strategies let families reset the cost basis of inherited appreciated assets to fair market value on the date of death, erasing decades of unrealized capital gain in a single moment. This guide explains which assets qualify, how married couples can double the benefit, when a lifetime gift backfires, and how to sequence holding, gifting, and Roth conversions around the rule under 2026 tax law.

Last reviewed: October 5, 2026 | Written and reviewed by Craig Wear, CFP®, founder of Q3 Advisors

What is the step-up in basis rule?

When you inherit a capital asset, your cost basis is generally reset to its fair market value on the original owner’s date of death. This reset is the step-up in basis, governed by Section 1014 of the Internal Revenue Code. The practical effect: appreciation the owner never sold, and never paid tax on, disappears for the heir’s income-tax calculation. If your parents bought stock for $10,000 that is worth $100,000 at death, your basis becomes $100,000, and selling the next day owes zero capital gains tax on roughly $90,000 of gain.

The rule matters more than ever in 2026. The One Big Beautiful Bill Act (OBBBA, P.L. 119-21) made the higher federal estate exemption permanent at $15,000,000 per person ($30,000,000 per married couple), indexed for inflation. Because most families now have no federal estate-tax exposure, the step-up in basis is a central mechanic deciding how much of an appreciated estate reaches the next generation.

How does the basis reset actually work?

To see the impact, compare two scenarios for the same inherited asset: a rental property bought for $150,000 and worth $600,000 on the date of death.

Without a step-up. Taking the property at the decedent’s original $150,000 basis and selling at $600,000 triggers capital gains tax on $450,000 of gain. At the top federal long-term rate of 20%, plus the 3.8% Net Investment Income Tax, that is roughly $107,100 in federal tax alone, before state tax.

With a step-up. The heir’s basis instead becomes $600,000. Sell immediately and the capital gains tax is zero; the entire $450,000 of appreciation is erased for income-tax purposes. Critics call this the “angel of death loophole”; planners treat it as a cornerstone of legacy design.

Which assets qualify for the reset, and which don’t?

Assets that get a full step-up

Capital assets held outside tax-deferred wrappers generally receive a full step-up when included in the taxable estate: stocks and bonds, taxable-account mutual funds, investment real estate, vacation homes, a primary residence, closely held business and LLC interests, and collectibles such as art, jewelry, and precious metals.

Assets that get NO step-up: traditional IRAs, 401(k)s, and IRD

Tax-deferred retirement accounts do not receive a step-up in basis. A traditional IRA, 401(k), pension, or non-qualified annuity is income in respect of a decedent under IRC Section 691, so heirs pay ordinary income tax on withdrawals at their own bracket. Most non-spouse beneficiaries must also empty the account within ten years under the SECURE Act, compressing that tax into a decade.

NUA stock and the partial step-up

Net unrealized appreciation (NUA) employer stock sits between the two extremes. If you distributed company stock from a 401(k) to a taxable account during life using the NUA strategy, appreciation after the distribution receives a step-up at death. The original NUA amount, however, is IRD: heirs who sell pay long-term capital gains tax on that portion, just as you would have.

How can married couples double the step-up?

Community-property states vs. common-law states

The main married-couple difference is the state property regime. In a common-law (separate-property) state, spousal joint tenancy earns only a half step-up at the first death: the deceased spouse’s half resets to fair market value, while the survivor keeps original basis on their half. In a community-property state, IRC Section 1014(b)(6) gives both halves a full step-up when the first spouse dies.

Consider a couple who bought a home for $200,000, now worth $1,000,000. In a common-law state, only $500,000 resets at the first death and the survivor keeps a $100,000 basis on their half, leaving $400,000 of built-in gain. In a community-property state, the survivor’s basis becomes the full $1,000,000.

The double step-up and QTIP trusts

A double step-up captures a fresh basis reset at each spouse’s death. A common structure routes assets through a QTIP (qualified terminable interest property) trust: the property qualifies for the unlimited marital deduction at the first death, and the executor makes the QTIP election on the estate-tax return so it is included in the surviving spouse’s estate. Because it is included there, it receives a second step-up when the survivor later dies.

The joint-tenancy and add-a-child-to-title traps

Adding a non-spouse to title is a frequent and expensive mistake. When a parent adds an adult child as joint tenant on real estate or a brokerage account, the parent gives away half-ownership during life. At death only the parent’s half receives a step-up; the child keeps carryover basis on their half. A revocable living trust or transfer-on-death deed usually avoids probate while preserving the full step-up.

Can you get a step-up while you’re still alive, or by gifting assets?

Assets you give away during life keep your original basis in the recipient’s hands. If you bought stock for $20,000 and gift it when it is worth $100,000, the recipient takes your $20,000 basis and owes tax on $80,000 of gain when they sell. The step-up applies only to assets that pass through your estate at death, which is why gifting highly appreciated assets during life is often the tax-disadvantaged choice.

The Section 1014(e) one-year boomerang rule

One idea sounds clever and fails by design: gifting a low-basis asset to an ailing relative so it returns to you at death with a stepped-up basis. IRC Section 1014(e) blocks it. If you give appreciated property to someone who dies within one year, and it passes back to you (or your spouse), no step-up is allowed. Your basis stays at the decedent’s carryover basis, so the gain is not erased.

How to use the step-up in your estate plan

Holding appreciated assets until death. Selling a highly appreciated asset during life gives up the step-up and triggers capital gains tax now. If living expenses can be funded another way, holding lets heirs take the asset at date-of-death value with the built-in gain erased.

Gifting low-basis or cash assets, not appreciated ones. Because a lifetime gift transfers carryover basis, an asset with little unrealized gain (or plain cash) is a better gifting candidate than a position you would rather step up at death.

Donating appreciated securities directly. Giving long-held appreciated securities straight to a public charity or donor-advised fund avoids the capital gain entirely and generally supports a fair-market-value deduction, often more efficient than selling, paying tax, and donating the cash that remains.

Why IRA millionaires convert IRAs but hold taxable assets

Two accounts of equal size can deliver very different inheritances. A $1,000,000 taxable brokerage account with $700,000 of unrealized gain passes to heirs with basis reset to $1,000,000; they can sell the next day and owe no capital gains tax. A $1,000,000 traditional IRA passes with its full pre-tax balance intact, and non-spouse heirs must empty it within ten years, paying ordinary income tax at their own bracket.

That asymmetry points to a sequencing many retirees adopt in the gap years between retirement and required minimum distributions:

1. Fund living expenses from taxable accounts first, so appreciated positions stay put and head toward a step-up.
2. Convert traditional IRA dollars to Roth at a bracket you control today (often 22% or 24%), rather than passing the bill to heirs at 32% or higher later.
3. Hold appreciated taxable assets until death so the step-up erases the gain for heirs.

A conversion’s break-even horizon and its December 31 deadline interact with required minimum distribution timing at age 73 (age 75 for those born in 1960 or later, first applying in 2035), and deciding how much to convert is a multi-year exercise. For the wider legacy plan, see the companion guide to tax-saving tips for estate planning and Roth conversions; this page focuses on the basis mechanics behind the sequencing.

Frequently asked questions

What assets do not get a step-up in basis?

Assets that do not get a step-up in basis are those treated as income in respect of a decedent: traditional IRAs, 401(k)s, other pre-tax retirement accounts, pensions, and non-qualified annuities. Heirs pay ordinary income tax on withdrawals from these, with no basis reset. Roth IRAs also receive no step-up, but qualified distributions are already tax-free, so no reset is needed.

What is the disadvantage of step-up in basis?

The main disadvantage of the step-up in basis is that it applies only at death, not during life, so heirs cannot access it early. It also does not cover IRD assets like traditional IRAs, and it can lull families into a wait-until-death posture that ignores liquidity or diversification needs. Policy critics argue it lets large lifetime gains escape income tax entirely.

Can you step up basis while you are still alive?

No, you cannot step up basis while you are still alive. The Section 1014 step-up is triggered only by death, when an asset is included in the decedent’s estate. Selling or gifting an asset during life instead realizes gain or transfers carryover basis. Assets in a revocable living trust still qualify at death because they remain in your taxable estate.

How do you avoid capital gains tax on inherited property?

You generally avoid capital gains tax on inherited property by relying on the step-up in basis: the property’s basis resets to fair market value on the date of death, so selling near that value produces little or no gain. Obtaining a dated appraisal supports the stepped-up figure. In community-property states, both spouses’ halves can qualify for a full step-up.

Does a trust get a step-up in basis?

It depends on the trust. Assets in a revocable living trust (a grantor trust) remain in the grantor’s taxable estate and do receive a step-up in basis at death. Assets in most irrevocable trusts are removed from the estate and generally do not get a step-up, unless the trust is drafted so the assets are still included in the taxable estate. Retirement accounts follow different rules, as covered in whether a 401(k) can be put in a trust.

What is the difference between carryover basis and a step-up in basis?

Carryover basis applies to lifetime gifts: the recipient takes the giver’s original cost basis, so built-in gain follows the asset. A step-up in basis applies to inheritances: the basis resets to fair market value on the date of death, erasing prior gain. The difference is why holding appreciated assets until death is often better than gifting them.