Stepped-up Basis
What Is Stepped-up Basis?
Stepped-up basis is a tax rule that adjusts the value of inherited assets to their fair market value at the time of the original owner’s death.
This new value becomes the basis used to calculate capital gains if the asset is later sold.
Why It Matters
Stepped-up basis can significantly reduce the capital gains taxes owed by heirs when inherited assets are sold.
It is an important concept in estate planning and wealth transfer.
How Stepped-up Basis Works
When a person inherits an asset such as stock or real estate, the cost basis is reset to the asset’s market value at the time of inheritance.
Future capital gains are calculated based on this updated value rather than the original purchase price.
Example
If an investor purchased stock for $10,000 and the value rises to $40,000 at the time of their death, heirs inherit the asset with a new basis of $40,000.
If they sell the stock immediately for $40,000, no capital gain is realized.
Stepped-up Basis vs Cost Basis
- Cost basis reflects the original purchase price.
- Stepped-up basis adjusts that value to the market value at inheritance.
FAQs About Stepped-up Basis
Does stepped-up basis apply to all inherited assets?
It commonly applies to assets such as stocks, bonds, and real estate.
Why is stepped-up basis important for taxes?
It may reduce or eliminate capital gains taxes for heirs.
Is stepped-up basis available for gifted assets?
No. Gifted assets usually retain the original cost basis.
Related Terms
