What Is Stepped-Up Basis?
The Tax Break That Can Save Your Heirs Six Figures
Stepped-up basis resets the cost of inherited property to its value at death — so heirs can sell with little or no capital-gains tax. Here's how it works, and the one move that throws it away.
Stepped-up basis is the tax rule that resets the cost basis of inherited property to its fair-market value on the date the owner dies.In plain terms: when you inherit a house, land, or stocks, the IRS treats your “cost” as what the asset was worth on the day you inherited it — not what the original owner paid decades ago. The lifetime of appreciation that built up simply disappears for tax purposes, so you can sell soon after with little or no capital-gains tax.
By Jason Anderson
Co-Founder, 406 Consulting Group
Big-firm tax background with a Six Sigma discipline for systems and job costing.
What is stepped-up basis, exactly?
“Basis” is tax-speak for what you paid for something. When you sell, you pay capital-gains tax on the sale price minus your basis. The step-up rule (Internal Revenue Code Section 1014) says that at death, the basis of what the person owned resets to the current market value. Their heirs start fresh at today's number.
How it plays out
Grandpa bought a Montana cabin in 1990 for $60,000. At his death it's worth $520,000. His granddaughter inherits it, and her basis steps up to $520,000. She sells it for $520,000 — taxable gain: $0. Without the step-up, she'd have a $460,000 gain and a capital-gains bill well into the tens of thousands.
Why does stepped-up basis matter so much?
Because for most families, a home or a piece of land is the asset that appreciated the most over a lifetime — and the step-up can erase a six-figure capital gain in a single stroke. It is one of the most valuable breaks in the tax code for ordinary families, and it applies to houses, land, rental property, and investment accounts (not to retirement accounts like IRAs and 401(k)s, which have their own rules).
What's the one move that throws the step-up away?
Giving the property away during your life instead of letting it pass at death. The most common version: adding your kids to the deed to avoid probate. A lifetime transfer is a gift, and gifts carry your original basis forward to the recipient (Section 1015) — there is no reset. On the share you gave away, the step-up is gone, and your kids can face a capital-gains bill that probate never would have created.
We walk through exactly how this backfires — with the six-figure math — in You Added Your Kids to the House Deed to Avoid Probate. Did You Just Create a Six-Figure Tax Problem?
How do you keep the step-up?
Make sure the property passes at death, not during your life. A revocable living trust, a transfer-on-death deed (available in Montana and most states), or even a plain will all let the property pass at death — so it keeps the full step-up. Each of those is a legal and estate-planning decision for your attorney; our job is to run the tax numbers so the choice is made with eyes open.
Not sure your estate plan protects the step-up?
We'll run the basis and capital-gains math on your home and coordinate with your estate attorney — before anything is signed.
FAQ
Does stepped-up basis apply to a house?
Yes. A home is one of the most common assets to receive a stepped-up basis. If you inherit a house, its basis generally resets to the fair-market value on the date of the owner's death, so you can sell near that value with little or no capital-gains tax. It also applies to land, rental and investment property, and taxable brokerage accounts — but not to IRAs or 401(k)s, which follow different rules.
Do you lose the stepped-up basis if property is gifted?
On gifted property, generally yes. A gift made during the giver's life carries the giver's original cost basis forward to the person receiving it (Section 1015), rather than resetting at death. That is why adding your children to your deed — a lifetime gift — can forfeit the step-up on the share you give and create a large capital-gains bill when the property is later sold.
Does a transfer-on-death deed keep the stepped-up basis?
Yes. Because a transfer-on-death deed passes the property at your death rather than during your life, the property is included in your estate and receives the full step-up — while still avoiding probate. That is a big part of why it is usually a better probate-avoidance tool than adding your kids to the deed. Which tool fits your situation is a decision to make with an estate attorney.
This article is general tax education, not legal, tax, or financial advice for your specific situation. Estate and deed decisions should be made with a qualified estate attorney.
In one line
Inherited property's basis resets to market value at death — so heirs sell with little or no capital-gains tax. Give it away during life and you lose that reset.
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