Step-Up in Basis at Death and How It Changes Your Decisions

A client in her 70s owns $2 million of a single stock she bought for $80,000 in the 1990s. Selling it would trigger nearly $2 million of long-term capital gain and a six-figure tax bill. Giving it to her children would hand them the same problem. Holding it until she dies makes the gain disappear. That is the step-up in basis, and it is the single most important tax rule in estate planning for families who will never owe estate tax.

The rule is simple to state and surprisingly hard to apply well. It changes whether you should sell an appreciated asset or keep it, whether you should gift to children now or leave assets at death, how you should title property with a spouse, and which accounts you should spend first in retirement. Get it wrong and a family pays capital gains tax that a different sequence would have avoided.

This article explains how the step-up works, which assets qualify and which do not, how the rule interacts with gifting and trusts, and how it should shape decisions while you are alive. It is educational, not tax or legal advice. Attend does not prepare tax returns or draft documents; we model these choices and coordinate with your CPA and outside estate planning attorney.

How the Step-Up in Basis Works

Cost basis is what you paid for an asset, adjusted for things like reinvested dividends, improvements to real estate, or depreciation. When you sell, you owe capital gains tax on the difference between the sale price and your basis. Under Section 1014 of the tax code, property acquired from a decedent takes a basis equal to its fair market value on the date of death. The IRS explains the rule in Publication 559, the guide for survivors and executors.

The effect is that all the appreciation during the owner's lifetime is never taxed as income. If the heir sells the day after death, the gain is roughly zero. If the heir holds the asset, future gains are measured from the new basis. The rule works in both directions: an asset that has lost value gets a stepped-down basis, and the loss is wasted, which is one reason to sell losing positions before death rather than after.

The executor or heirs establish the date-of-death value. For publicly traded securities that is the average of the high and low price on the date of death. For real estate, a business, or collectibles, an appraisal is needed, and it should be obtained promptly rather than reconstructed years later.

Which Assets Get a Step-Up and Which Do Not

The step-up applies to capital assets owned by the decedent at death, whether they pass by will, by trust, by beneficiary designation, or by joint ownership. That covers a wide range:

• Individual stocks, bonds, mutual funds, and ETFs in taxable brokerage accounts.
• Real estate, including a primary residence, rental property, and land.
• Interests in a closely held business, partnership, or LLC.
• Collectibles, art, and other tangible property.
• Assets in a revocable living trust, which are still treated as owned by the grantor.

Assets that do not get a step-up

The exceptions are the assets high earners tend to have the most of. Traditional IRAs, 401(k)s, 403(b)s, and other pre-tax retirement accounts are income in respect of a decedent (IRD). The beneficiary pays ordinary income tax on every dollar withdrawn, just as the owner would have. Roth accounts pass income-tax free under the Roth rules, not a step-up. Non-qualified annuities, deferred compensation, and the untaxed interest on savings bonds are IRD as well. Life insurance death benefits are income-tax free by their own rule.

Assets you gave away during life do not get a step-up, because you did not own them at death. That includes assets in most irrevocable trusts. The IRS confirmed in Revenue Ruling 2023-2 that property held in an irrevocable grantor trust and excluded from the estate keeps its original basis.

The one-year rule

If you gift appreciated property to someone who dies within one year and the property comes back to you or your spouse, the step-up is denied. Congress added this to stop people from routing assets through a terminally ill relative to launder the basis.

Gifting vs Inheriting: Carryover Basis

When you give an asset during life, the recipient takes your basis. This is called carryover basis. Give your daughter stock worth $500,000 that you bought for $50,000, and she owns stock with a $50,000 basis. When she sells, she pays tax on the $450,000 gain at her rate. Had she inherited the same stock, her basis would be $500,000 and the gain would vanish.

This creates a clear hierarchy for families below the estate tax exemption. Give cash, or give assets with high basis, and hold the low-basis assets until death. Never give away your most appreciated holdings unless there is a compelling reason. If you want to help a child buy a home, sell a high-basis position or use cash rather than transferring the stock you have held for thirty years.

The calculus changes only when the estate will owe federal estate tax. A 40 percent estate tax on the full value of an asset usually costs more than a 20 percent capital gains tax on the appreciation, so families above the exemption may deliberately gift appreciated assets to move growth out of the estate. Even then, the better gifts are the assets with the least built-in gain. Our guide to gifting to family covers the mechanics.

Gifting assets that have lost value

The carryover rule has a twist for losses. If you give an asset worth less than your basis, the recipient's basis for computing a loss is the lower fair market value. The built-in loss is lost to both of you. Sell losing positions yourself, harvest the loss, and give the cash instead.

Spouses, Joint Property, and Georgia Law

How property is titled between spouses changes how much of it gets a step-up. In the nine community property states, property acquired during marriage is community property, and when one spouse dies, both halves receive a full step-up. Georgia is a common law state, not a community property state. Here, property held jointly with right of survivorship between spouses is treated as owned half by each, and only the deceased spouse's half is stepped up.

Consider a couple with a jointly held brokerage account worth $1 million and a basis of $200,000. At the first death, the deceased spouse's half is stepped up to $500,000. The surviving spouse's half keeps its $100,000 basis. The account now has a combined basis of $600,000 rather than $1 million. The survivor will owe tax on $400,000 of gain if the account is sold, a gain that community property spouses would not face.

This has led some attorneys to recommend titling highly appreciated assets in the name of the spouse more likely to die first, so the entire asset receives a step-up. It is a legitimate strategy but a delicate one: it requires an honest conversation about health, exposes the asset to that spouse's creditors, and depends on the one-year rule not being triggered. This is an attorney conversation, not a do-it-yourself project.

How the Step-Up Should Shape Decisions While You Are Alive

Once you understand the rule, several planning choices follow naturally.

Which assets to spend in retirement

Retirees often assume they should spend taxable accounts first and let retirement accounts grow. The step-up complicates that. Low-basis taxable holdings are the best assets to leave to heirs, because they arrive clean. Pre-tax IRAs are the worst, because the heir inherits the income tax bill and, under current rules, usually must empty the account within ten years. That argues for drawing on IRAs, or converting them to Roth, while preserving appreciated taxable positions. Our article on retirement withdrawal order works through this trade-off.

Concentrated positions and older owners

A 45-year-old with a concentrated stock position should generally diversify, paying the tax, because decades of single-stock risk is not worth the deferral. A healthy 82-year-old with the same position faces a different calculation. The expected step-up may be a few years away, and the tax saved can be enormous. The right answer often involves hedging or partial sales rather than all or nothing. See our guide to concentrated stock strategies.

Charitable giving

Appreciated stock is the best asset to give to charity during life, because the deduction is based on fair market value and the gain is never taxed by anyone. It is a poor asset to leave to charity at death, because the step-up would have erased the gain anyway. Leave retirement accounts to charity, which pays no income tax on them, and leave appreciated stock to family.

Roth conversions

Because pre-tax accounts never get a step-up, converting them to Roth during lower-income years turns a tax liability your heirs would inherit into a tax-free asset. Paying the conversion tax from taxable cash also reduces the estate. This is common for families with taxable estates and for anyone whose children are in higher brackets than they are.

Documentation and Common Mistakes

The step-up is only as good as the records behind it. Custodians sometimes fail to update basis on inherited securities, especially when accounts are transferred rather than retitled, and years later the heir receives a 1099-B showing the original purchase price. The executor should confirm that every inherited position shows date-of-death basis and keep the valuation records permanently.

For real estate and businesses, obtain a written appraisal as of the date of death. Trying to establish a 2026 value in 2040 when the property is sold is expensive and often ends in a compromise with the IRS. For a home, the IRS rules on the home sale exclusion interact with the step-up; an inherited home usually has little gain to exclude anyway.

Other frequent errors include adding a child to the deed of a home to avoid probate, which is a gift of half the house with carryover basis and forfeits half the step-up; putting appreciated assets into an irrevocable trust for a family that owes no estate tax; and selling appreciated assets in the final months of a terminal illness to simplify things, when holding would have erased the gain.

The step-up in basis rewards patience and punishes well-meaning shortcuts. Hold your most appreciated assets, give cash or high-basis assets when you want to help family, think carefully about how property is titled between spouses, and make sure the executor documents values at death. Our tax planning work models these choices in coordination with your CPA and estate planning attorney.

Tony Colunga · Founder, Attend Wealth

Tony leads Attend Wealth, a fee-based wealth management firm in Atlanta serving professionals, families, physicians, and business owners. Advisory services are held to a fiduciary standard. More about Attend