Stepped-Up Basis: How It Affects Inherited Assets

Posted in Triplett & Carothers on August 3, 2025

An asset’s basis is its original purchase price, which determines how much tax will be owed when the asset is sold.

When an asset is inherited, the so-called stepped-up basis resets this value to the asset’s fair market value at the time of the owner’s death.

For example, if a family home was purchased for $100,000 but is worth $500,000 at the time of inheritance, the stepped-up basis is $500,000. This effectively eliminates capital gains taxes on the $400,000 appreciation that occurred during the original owner’s lifetime. When the heir eventually sells the asset, they will owe capital gains tax only on any increase in value beyond the stepped-up basis.

Additional provisions combine with the stepped-up basis to further reduce possible tax implications. For example, to qualify for lower long-term capital gains tax rates, an asset must usually be held for more than one year. However, if an asset is inherited, it’s automatically treated as if it has been held for more than one year, regardless of how long the deceased owner actually held it.

The stepped-up basis also prevents double taxation on inherited assets. While an estate may be subject to taxes, heirs do not pay capital gains tax on appreciation that occurred before inheritance.

Exceptions and special cases

However, not all assets are eligible for a stepped-up basis. For example:

  • If a property is jointly owned, only the deceased’s share receives a stepped-up basis. However, in community property states, married couples benefit from a full stepped-up basis on all jointly owned assets.
  • Inherited retirement accounts (IRAs, 401(k)s, etc.) do not qualify for a stepped-up basis. Withdrawals remain subject to income tax. Certificates of deposit and annuities are similarly ineligible for a stepped-up basis.
  • Farms or closely held businesses have the option of adjusted stepped-up calculations based on what is called the special use valuation.

Maximizing the stepped-up basis

Understanding the stepped-up basis can help reduce taxes for your heirs. Here are some strategies to consider:

  • Leave highly appreciated assets to heirs rather than gifting them during your lifetime. Assets passed through your estate receive the stepped-up basis, reducing capital gains taxes for heirs. In contrast, gifted assets retain your original cost basis, meaning the recipient may face higher capital gains taxes when they sell.
  • Consider estate tax vs. capital gains tax when planning asset transfers. If your estate is below the federal estate tax exemption, keeping assets in your estate for a stepped-up basis may be the most tax-efficient strategy. However, if your estate is taxable, gifting assets during your lifetime may reduce estate tax liability, even if it results in some capital gains taxes.

By understanding how the stepped-up basis applies to your finances, you can make informed gifting and legacy decisions to minimize taxes for your heirs. Consult with legal and tax experts to ensure your strategy aligns with current tax laws.

Reach out to Roz Carothers and her team at Triplett & Carothers to learn more.

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