Step-Up Basis Calculator

When you inherit an asset, your cost basis "steps up" to the fair market value on the date of the owner's death — erasing decades of embedded capital gains. This calculator estimates how much federal tax that step-up saved you, and what you'll owe if you sell.

What is step-up in basis?

Under IRC §1014, when you inherit an asset — stocks, mutual funds, real estate, a business interest — your cost basis becomes the fair market value (FMV) on the date of the owner's death. This "steps up" (or sometimes steps down) from what the decedent originally paid.

The effect is enormous. If your mother held $500K of stock she bought for $80K over 30 years, the $420K of embedded gain disappears at her death. You inherit at $500K basis. Sell immediately: $0 capital gains tax. Hold and sell later: you only owe tax on appreciation above $500K.

Step-up is one of the largest tax benefits in the entire code. It applies automatically — you don't have to elect it. But you must document the FMV at death correctly or you risk an IRS dispute later.

Inherited assets are always long-term

Under IRC §1223(11), inherited assets automatically qualify for long-term capital gains rates — regardless of how long you hold them. You could sell an inherited stock the day after inheriting it and pay 0%, 15%, or 20% (based on your income), not the higher short-term rate. This applies even if the decedent held the asset for only a week.

2026 long-term capital gains rates (IRS Rev. Proc. 2025-32):

LTCG brackets are based on total taxable income (ordinary income + LTCG stacked on top). NIIT adds 3.8% on investment income for MAGI above $200K single / $250K MFJ.

Which assets get a step-up?

• Individual stocks and ETFs: FMV = closing price on the date of death (or average of high/low for thinly traded securities).
• Real estate: FMV = qualified appraisal. Get it done within 6 months — both for basis documentation and because the alternate valuation date option for estate tax purposes expires at 6 months.
• Mutual funds: FMV = net asset value (NAV) on the date of death.
• Business interests (LLC, partnership, S-corp): Generally get a step-up, but entity structure matters. S-corp step-up often requires a §338(h)(10) or §336(e) election at the entity level to flow through to the operating assets. Get specialized advice here.
• IRAs and 401(k)s: no step-up. These accounts were pre-tax; every dollar distributed is taxable as ordinary income. For inherited retirement accounts, see our Inherited IRA 10-Year Drawdown Calculator.
• Annuities: no step-up. Accumulated gains inside annuities are taxable as ordinary income to the beneficiary.

Joint property and community property rules

Joint tenancy (JTWROS) — half step-up only

For jointly held property, only the decedent's share steps up. Example: a parent and child own a rental property 50/50, bought for $100K (each owns $50K basis), now worth $400K. Parent dies. Parent's half steps up from $50K to $200K. Child's half stays at $50K (original basis). Combined new basis: $250K. Sell the property for $420K — gain is $170K, not $320K.

Community property states — full step-up for both halves

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), the surviving spouse typically receives a full step-up on both halves of community property — not just the decedent's half. This is a major benefit unique to these states.

Example: Married couple in California owns appreciated stock as community property, bought for $100K, now worth $600K at death of one spouse. The survivor's full $600K basis steps up. Sell all shares: $0 capital gains tax. In a non-community-property state with JTWROS, only half would step up — leaving $250K of gain exposed.

When the basis steps down

If an asset was worth less at death than the decedent originally paid, the basis steps down to that lower FMV. A stock bought for $100K that fell to $60K before death means you inherit at $60K basis — future recovery of value is fully taxable, and the decedent's $40K paper loss is permanently gone from a tax standpoint.

In some cases, advisors consider selling a depreciated asset before death to recognize the loss on the decedent's final return, avoiding the step-down. This strategy requires careful timing and wash-sale analysis — not a DIY decision.

The §1014(e) trap: gifts returned at death

If you transferred an appreciated asset to someone who then dies within one year and bequeaths it back to you (or your spouse), the step-up is denied under IRC §1014(e). Your basis stays at the original donor's cost. This rule closes the "deathbed gift" loophole where assets were gifted to a dying person purely to manufacture a step-up. If you're considering gifting an appreciated asset to an elderly parent, get advice before acting.

Real estate: the depreciation recapture issue

Inherited rental property gets a fresh depreciation schedule starting at the stepped-up FMV. This wipes out accumulated depreciation recapture — one of the most valuable secondary benefits of the step-up for real estate investors.

Example: Parent bought a rental for $200K, took $150K of depreciation over 30 years, now it's worth $800K. Without the step-up, selling would trigger: (1) $600K of capital gain taxed at 20%, and (2) $150K of depreciation recapture taxed at 25%. Total tax: well over $150K. With step-up at death, heir inherits at $800K basis, depreciation schedule resets, and selling immediately produces zero gain and zero recapture.

Common scenarios

Inherited brokerage account: sell or hold?

You inherit a $400K brokerage account (stepped-up basis) that the decedent built from $60K over 25 years. You're single with $90K other income. If you sell all of it today: capital gain = $0, federal tax = $0. You could immediately rebalance the portfolio to your own asset allocation with no tax cost — a once-in-a-lifetime portfolio reset. Waiting and selling later means paying tax only on appreciation above $400K.

Inherited rental property: sell, rent, or live in it?

You inherit a house worth $750K (stepped-up basis) that was bought for $80K. Options:

• Sell immediately: If the estate settles quickly and you sell before significant appreciation, gain is near $0.
• Live in it for 2 years: After 2 years as your primary residence, §121 exclusion applies — $250K gain excluded ($500K if married). Useful if the property appreciates before sale.
• Rent it: You start a new depreciation schedule at $750K. Annual depreciation deduction is substantial. But each year you hold, you're re-accumulating recapture you'll owe on sale.

Already sold without knowing the step-up?

If you sold inherited assets and reported the original basis (not the stepped-up FMV at death), you may have significantly overpaid taxes. An amended return (Form 1040-X) can recapture that overpayment, but you need documentation of the FMV at the date of death — a brokerage statement, appraisal, or IRS estate tax filing. Statute of limitations is generally 3 years from the original filing date.

Sources

1. IRC § 1014 — Basis of Property Acquired From a Decedent (step-up rule).
2. IRC § 1223(11) — Inherited property automatically treated as long-term regardless of holding period.
3. IRS Rev. Proc. 2025-32 — 2026 inflation-adjusted tax parameters (LTCG thresholds: $49,450 / $98,900 / $545,500 / $613,700).
4. IRS Topic 409 — Capital Gains and Losses.
5. IRS — Net Investment Income Tax Q&A (3.8% surtax, $200K single / $250K MFJ threshold).

Values verified April 2026. Step-up rules for jointly held property, community property, and business interests have significant nuance — verify with a qualified tax advisor before making any transaction decisions.