Step-Up in Basis Calculator

What Is the Step-Up in Basis Rule?

The step-up in basis (also called a "stepped-up basis") is one of the most valuable tax provisions available to heirs in the United States. Under IRC Section 1014, when you inherit an asset — whether real estate, stocks, a business, or other investments — your cost basis for capital gains purposes is automatically reset to the fair market value of the asset on the date of the original owner's death.

This matters enormously because capital gains tax is calculated on the difference between your sale price and your basis. If the decedent bought a house in 1985 for $80,000 that is now worth $600,000, and you inherit it, your basis is not $80,000 — it is $600,000. If you sell immediately for $600,000, your taxable gain is $0, not $520,000.

The provision exists partly for administrative convenience (it can be very difficult to establish the original cost basis of assets held for decades) and partly as a matter of tax policy — the estate may already have paid estate tax on the full value of the asset.

How to Calculate Your Stepped-Up Basis (Worked Example)

The calculation has three key numbers: the original basis, the stepped-up basis, and the sale price.

Note that the date-of-death value must be established by a qualified appraisal for real estate, or from market records (closing prices) for publicly traded securities. This documentation is essential — the IRS may challenge an unsupported basis claim.

In some cases, you can elect an alternate valuation date of six months after death instead of the date of death, but only if the estate is required to file an estate tax return and the alternate date produces a lower estate value. This is an election by the estate, not the individual heir.

Step-Up in Basis for Real Estate (Most Common Use Case)

Real estate is by far the most common asset where the step-up in basis produces major tax savings. American homeowners routinely hold properties for 20, 30, or even 40 years, during which time values in many markets have increased five-fold or more. A home bought in the 1980s for $100,000 in a coastal city may be worth $1.2 million today.

Key points for inherited real estate:

• Primary residences, rental properties, vacation homes, and raw land all qualify for the step-up.
• Depreciation recapture on rental properties can be a complicating factor. Depreciation the decedent claimed over the years reduces the original adjusted basis, which is why the taxable gain without a step-up can be even larger than it first appears. The stepped-up basis eliminates this issue entirely for property held until death.
• You will need a professional appraisal dated as close as possible to the date of death to establish the fair market value. Keep this document indefinitely — it is your proof of basis if the IRS ever questions your return.
• If the property was held in a trust, its treatment depends on the type of trust. Assets in a revocable (living) trust at the time of death typically do receive the step-up. Assets in an irrevocable trust generally do not.
• The Section 121 home sale exclusion ($250,000 single / $500,000 MFJ) is a separate provision. As an heir, you would need to live in the inherited home for two of the five years before sale to use it — it does not apply automatically to inherited property.

Use our capital gains tax calculator to model different sale price scenarios for your inherited real estate.

Step-Up in Basis for Inherited Stocks and Investments

The step-up in basis applies equally to financial assets: individual stocks, mutual funds, ETFs, bonds, and other securities inherited from a decedent.

Practical points for inherited investment accounts:

• Date-of-death value is straightforward for publicly traded securities — it is the average of the high and low trading prices on that date, or the closing price. Brokerage custodians will typically update the cost basis in the inherited account automatically.
• Long-term holding period is automatic. Any sale of inherited securities qualifies for long-term capital gains rates regardless of how long you actually hold them after inheriting. There is no one-year waiting period.
• IRAs and 401(k)s do not receive a step-up. These accounts are tax-deferred, so distributions are taxed as ordinary income regardless. The step-up only applies to assets held in taxable (non-retirement) accounts.
• If you inherit a brokerage account with a mix of positions, each lot receives its own separate step-up based on its value at the date of death.
• Mutual fund capital gain distributions are still taxable to the heir after inheriting — the step-up only resets the basis for the purpose of calculating gain on the sale of the shares themselves.

Step-Up in Basis in Community Property States

If the decedent was married and lived in a community property state, there is a potential double benefit: both the decedent's half and the surviving spouse's half of community property may receive a step-up in basis when one spouse dies.

This "double step-up" can produce enormous tax savings on long-held appreciated assets. For example, if a couple bought a home for $200,000 that is now worth $1,000,000, the surviving spouse's basis could be stepped up from $100,000 (their half of the original basis) to $500,000 (their half of the current FMV), even though they are still alive and still own that half.

The nine community property states are:

In non-community property states, jointly owned assets typically receive only a partial step-up — only the decedent's half gets stepped up, while the surviving spouse's half retains its original basis.

When There Is No Step-Up: Gifts vs. Inheritance

This is perhaps the most important planning distinction in all of tax law: gifts made during your lifetime do not receive a step-up in basis. The recipient of a gift takes the donor's carryover (original) basis.

Consider these two outcomes for the same highly appreciated asset:

This is why financial planners routinely advise: don't gift highly appreciated assets — let them pass through your estate instead. The gift tax annual exclusion ($18,000 per recipient in 2025) and lifetime exemption are useful for gifts of cash or low-basis assets, but gifting appreciated stock or real estate to avoid estate tax often creates a larger capital gains tax bill for the recipient than the estate tax savings would have justified.

See our gift tax calculator to understand the gift tax implications of transfers you are considering.

Step-Up in Basis and Estate Planning Strategy

Understanding the step-up in basis opens up a range of planning strategies that can save your family significant taxes across generations.

• "Hold until death" strategy for appreciated assets: If you own highly appreciated property and your estate is below the federal estate tax exemption ($13.99 million per person in 2025), there may be no reason to sell. Hold the asset, pass it to your heirs, and let the step-up eliminate the embedded capital gain entirely.
• Basis harvesting: Some planners suggest that elderly parents with low-basis assets should consider selling and repurchasing to recognize gains while in a low tax bracket — but this is rarely better than simply waiting for the step-up at death. The math usually favors the step-up.
• Grantor trusts and basis tricks: Certain irrevocable grantor trusts can be structured to include a "swap power" that allows the grantor to exchange low-basis assets in the trust for high-basis (cash) assets outside the trust. This pulls the low-basis asset back into the taxable estate and allows it to receive the step-up. This is a sophisticated strategy requiring an attorney.
• Step-up and the estate tax exemption sunset: The current $13.99 million per-person exemption is scheduled to sunset after 2025 to approximately $7 million. This may change the calculus for large estates — some families may face both estate tax and capital gains tax on the same appreciation. See our inheritance tax calculator for estate tax estimates.
• Charitable remainder trusts (CRTs): If you want to sell appreciated property but avoid capital gains, a CRT allows the trust to sell the property tax-free, reinvest the proceeds, and pay you an income stream, with the remainder passing to charity at death. No step-up is needed because the trust is exempt from capital gains.
• Installment sales to family members: Another planning option for large estates, allowing the gain to be spread over many years at potentially lower marginal rates.