When someone dies owning appreciated property, U.S. tax rules often give heirs a step-up (or step-down) in cost basis to fair market value around the date of death (or the alternate valuation date when an estate elects it). That new basis can erase unrealized capital gains that built up during the decedent’s life—so a later sale may generate little or no taxable gain. This page is orientation for taxable brokerage shares, real estate outside special rules, and common “what does not step up” traps—not estate-planning advice.
Taxable account mechanics: Taxable brokerage account basics. Gain/loss vocabulary: Capital gains basics. Return filing context: Filing taxes for beginners.
What usually gets a basis adjustment
| Asset (typical) | Common outcome at death | Later sale uses |
|---|---|---|
| Individual stocks / ETFs in a taxable brokerage (Fidelity, Vanguard, Schwab, etc.) | Basis often adjusts to FMV at death (or alternate date) | New basis vs sale proceeds; holding period for heirs is generally treated as long-term for many inherited capital assets |
| Real estate held in the decedent’s name (primary home, rental) | Realty often receives a basis adjustment; primary-home §121 is a different lifetime rule | Adjusted basis vs sale price; depreciation history on rentals still matters for heirs—confirm with a pro |
| Jointly owned property | Rules depend on ownership form and contribution; community-property states often step up both halves | State and title details drive the math |
| Assets already sold before death | No “step-up” on property the decedent no longer owned | Decedent’s final return may still report that lifetime sale |
Long-term vs short-term clocks for non-inherited sales: Capital gains holding periods. Portfolio construction still comes first while you are alive: Investing basics for beginners.
What usually does not get a classic step-up
| Item | Why people get surprised |
|---|---|
| Traditional IRA / 401(k) pre-tax balances | Beneficiaries generally inherit income-tax characteristics, not a capital-gains step-up; distributions are often ordinary income under current IRA rules (Inherited IRA 10-year rule) |
| Roth IRA contributions / earnings (qualified) | Different rules; not the same as a brokerage step-up story |
| Income in respect of a decedent (IRD) items | Some unpaid income rights do not receive a basis step-up the way appreciated stock does |
| Property given away during life (completed gifts) | Donee generally takes carryover basis; lifetime gifts are not death step-ups |
| Assets in some trusts | Trust type and powers matter; “revocable living trust” funding often still allows estate inclusion and basis adjustment—irrevocable designs vary |
Do not assume a 1099-B from the custodian already shows the stepped-up basis. Heirs often need date-of-death valuations, estate paperwork, and broker lot updates.
Worked example: $40,000 basis → $118,000 at death
Jordan inherits 200 shares of an S&P 500 ETF held in a parent’s taxable Schwab brokerage. The parent’s original basis was $40,000. Fair market value on the date of death is $118,000. Six months later Jordan sells all shares for $121,000 (after a small further rise).
| Slice | Illustrative amount |
|---|---|
| Old (decedent) unrealized gain | $118,000 − $40,000 = $78,000 (generally wiped for heirs via step-up—not taxed on Jordan’s sale as that historical gain) |
| Jordan’s basis after step-up | $118,000 (FMV at death, illustrative) |
| Jordan’s taxable gain on sale | $121,000 − $118,000 = ~$3,000 (plus commissions/fees as applicable) |
If Jordan had instead inherited a traditional IRA worth $118,000, selling ETF shares inside the IRA would not create a capital-gains event the same way—withdrawals follow IRA distribution rules, often as ordinary income. Different wrapper, different tax.
Practical habits for heirs and executors
- Request a date-of-death valuation (and alternate-date figures if the estate elects) for brokerage and realty.
- Ask the custodian how to update tax lots; keep PDF confirms.
- Separate IRA / 401(k) beneficiary claims from taxable-brokerage transfers—do not merge the mental models.
- Track carryover basis carefully on any property received by lifetime gift instead of inheritance.
- On a later sale, use the stepped-up basis on Form 8949 / Schedule D unless a pro says otherwise (Filing taxes for beginners).
- For primary-home sales during life, §121 exclusions are a different toolkit than death step-up—do not conflate them.
Mortgage product shopping stays shallow here—Home Loan Focus owns deep mortgage; this page is basis and capital-gains orientation only.
Checklist
- Inventory which assets are taxable brokerage / realty vs retirement accounts.
- Confirm ownership (sole, joint, trust) before assuming a full step-up.
- Get FMV documentation around the date of death.
- Update custodian lots; do not rely on memory of the decedent’s purchase price.
- Model IRA beneficiary tax separately from stepped-up brokerage sales.
- Keep estate and basis PDFs with the heir’s tax folder for future sales.
Educational only. Not tax, legal, estate, or investment advice. Basis, IRD, community-property, and trust rules are fact-specific and change; confirm with IRS publications and a qualified tax or estate professional before you file or sell.