Step-Up in Basis
When you die, your heirs inherit your appreciated assets at their value on your date of death, so the gain from your lifetime is wiped clean. It's the most powerful tax break in the code, and it rewards holding.
What happens to all the capital gains you’ve built up over a lifetime when you die? They vanish. The step-up in basis resets the cost basis of an inherited asset to its fair market value on the owner’s date of death, which erases every dollar of gain that piled up while they were alive.
How it works
Basis is what you paid for something. Your gain is the sale price minus that basis, and that’s what gets taxed. When you inherit an asset, the IRS “steps up” its basis to the value on the date of death. The decades of appreciation that happened on the original owner’s watch never get taxed.
Say your father bought a stock for $50,000 and it’s worth $500,000 when he dies. If he’d sold it the day before, he’d owe tax on $450,000 of gain. You inherit it instead, your basis becomes $500,000, and if you sell it that week you owe nothing.
What it applies to
Taxable assets that carry unrealized gains: individual stocks, real estate, a family business, collectibles. It does not apply to traditional IRAs or 401(k)s, which stay fully taxable to your heirs, and Roth accounts are already tax-free. The step-up is a feature of appreciated, after-tax property.
The part most people miss
This break quietly rewrites the gifting playbook. Hand a highly appreciated stock to your kids while you’re alive and they take your old basis, gain and all. Let them inherit it and the gain disappears. The instinct to “give it away now” can hand your family a tax bill that patience would have erased. The flip side: assets with little or no gain, or ones likely to keep climbing, can be better gifts during your lifetime. That tradeoff is the heart of step-up basis vs. lifetime gifting.
If your estate is large
For 2026 the federal estate and gift tax exclusion is $15,000,000 per person, so most families clear the federal estate tax entirely and the step-up becomes pure upside. The move is to hold appreciated assets, not gift them, and let the basis reset at death. Coordinate it with any Roth conversion plan, since IRA dollars get no step-up and are worth draining or converting first.
The step-up rewards the one thing most tax strategies fight: doing nothing. Hold the winners, and let the basis reset.
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