Definition
When an asset is inherited, its cost basis "steps up" to the fair market value on the date of death, eliminating all unrealized capital gains accumulated during the decedent's lifetime. This is one of the most valuable tax provisions in the U.S. tax code. It incentivizes holding appreciated assets until death rather than selling and paying capital gains tax during life.
lightbulb Example
An investor bought stock for $10K that grew to $500K. If sold during life: $490K gain taxed at 20% = $98K tax. If held until death: heirs inherit at $500K stepped-up basis. They sell at $500K with zero capital gains tax—$98K in savings.
Pro Tip
Donate your most appreciated stock to charity and hold the least appreciated until death for step-up—optimizes both income and estate taxes.
verified_user Key Points
- Resets basis to fair market value at death
- Eliminates all unrealized capital gains
- One of the most valuable U.S. tax provisions
- Incentivizes holding appreciated assets until death