Stepped-up basis (often called a basis step-up) is the common rule that property included in a decedent’s estate often takes a new cost basis equal to fair market value on the date of death (or the alternate valuation date when an estate properly elects it). For heirs who later sell inherited stock, ETFs, or a house in a taxable account, that reset can erase unrealized gains that accrued while the decedent was alive.
This sits next to everyday capital gains basics and taxable brokerage accounts. It is not the same as gifting during life (carryover basis) or selling inside an IRA/401(k) wrapper (Taxable vs tax-advantaged accounts).
Step-up vs carryover (life gift)
| Transfer | Typical basis for the recipient | Capital-gains cue |
|---|---|---|
| Inherit at death (many assets) | Fair market value at death (step-up; sometimes step-down if value fell) | Heir’s holding period for inherited property is often treated as long-term |
| Gift during life | Donor’s basis carries over (with adjustments) | Heir/donee may owe tax on the donor’s unrealized gain when they sell |
| Sell before death | Decedent realizes gain/loss on their final return | No step-up for what was already sold |
Retirement accounts (traditional IRA, 401(k)) generally do not get a “step-up” that turns pre-tax balances into tax-free cash - the income-tax character of distributions still matters for beneficiaries. Brokerage shares and many individually titled assets are where heirs most often notice the step-up on Form 1099-B later.
Confirm current IRC rules, community-property nuances, and estate-tax elections with IRS publications or a CPA/EA - Congress has debated changes over time (Filing taxes for beginners).
What heirs need from the broker or custodian
When someone inherits a Fidelity, Schwab, Vanguard, or E*TRADE taxable account:
- Date-of-death valuation for each lot (or average FMV used by the custodian’s inheritance process).
- Re-registration into the heir’s name or an estate/beneficiary account before selling.
- Cost-basis records showing the stepped-up figures - not the decedent’s original purchase prices - for future sales.
- 1099-B in the year of sale that reflects the new basis so software does not invent a huge gain.
If basis is missing, the IRS may treat missing basis harshly; keep estate paperwork, appraisal summaries for non-public assets, and custodian inheritance letters.
Worked example: inherited ETF with a large unrealized gain
Morgan’s parent bought $40,000 of a total-market ETF years ago. At death the position is worth $110,000. Morgan inherits the shares in a taxable account.
- Without a step-up (if this had been a lifetime gift with carryover basis): selling at $110,000 could realize roughly $70,000 of gain (before adjustments).
- With a date-of-death step-up to $110,000: if Morgan sells soon after at $110,000, taxable gain is roughly $0 (commissions/fees aside). If the ETF rises to $118,000 and Morgan sells, gain is about $8,000 - only post-death appreciation.
Morgan still owes tax on dividends received after inheritance and must watch wash-sale and lot tools if buying similar funds in another account (Capital loss carryforwards when losses appear elsewhere).
Planning cues (education, not estate advice)
- Appreciated taxable brokerage holdings are often where step-up matters most for heirs; cash and HYSA balances do not create capital-gains drama.
- Lifetime gifts of highly appreciated stock can move the tax problem to the recipient - compare to holding until death when estate goals allow.
- Joint ownership and community-property states can change how much basis adjusts; title matters.
- Recordkeeping beats folklore: heirs should request written FMV/basis from the custodian, not guess from old trade confirms.
Index-fund investing basics for the underlying portfolio: Investing basics for beginners.
Title and beneficiary forms decide who inherits the account before basis math begins: Account beneficiaries. Bank POD designations are the cash-account version of that title decision: Payable-on-death accounts.
A home you lived in can also involve the Section 121 exclusion on a sale: Capital gains on primary residence.
Checklist
- Identify which assets transferred at death vs by lifetime gift.
- Request date-of-death valuations and stepped-up basis from each custodian.
- Re-register accounts before selling when the estate process requires it.
- Expect long-term holding-period treatment for many inherited capital assets - confirm with a preparer.
- Do not assume IRAs/401(k)s get a capital-gains step-up that erases income tax on distributions.
- Save inheritance letters and 1099-B files with the tax return year of any sale.
- IRA distribution control for heirs (custodial vs trusteed wrappers): Trusteed IRA basics.
Educational only. Not tax, legal, or estate-planning advice. Basis rules, community property, and estate elections are fact-specific; confirm with a qualified tax professional or estate attorney.