Step-up in Basis.

In plain English

Step-up in basis is the rule that resets the tax cost of an inherited asset to its fair market value on the day the original owner died. Cost basis is what the IRS treats as your purchase price when figuring gain or loss on a sale. Because the basis steps up to the date-of-death value, the heir can sell soon after and owe little or no capital gains tax on decades of growth that happened while the owner was alive. This is one of the biggest tax breaks in the code, and it only applies to assets passed at death, not to gifts made while alive.

01Why it matters

Inheriting stock or property and selling it right away can mean owing almost no capital gains tax, while gifting that same asset before death hands your heir your old low basis and a much bigger tax bill.

02The math, step by step

Your parent bought stock for $20,000 and it is worth $120,000 when they die. You inherit it. Your basis steps up to $120,000. If you sell it the next week for $120,000, your taxable gain is $0, even though the stock grew $100,000 over the parent's lifetime. Had they gifted it to you while alive, your basis would have stayed $20,000 and a sale would have produced a $100,000 taxable gain.

03What this is NOT

04Receipts

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