Updated June 17, 2026
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When you inherit appreciated property, your cost basis for capital gains purposes resets to the fair market value on the date of death, not the original purchase price. Sell the inherited property at or near that stepped-up value and you owe little or no capital gains tax, even if the asset appreciated enormously during the decedent's lifetime.
A simple example
Say a parent bought stock for $20,000 thirty years ago. At death it is worth $500,000. Had the parent sold it, the $480,000 gain would have been taxable. An heir who inherits the stock takes a basis of $500,000. Sell for $500,000 and the capital gain is zero. Sell for $510,000 a year later and only the $10,000 of post-inheritance appreciation is taxable.
What qualifies for the step-up
The step-up applies to property in the decedent's gross estate: individually owned assets, community property (a 100% step-up in community property states), jointly held property with a non-spouse (half step-up), real estate, stocks, bonds and business interests. Assets held in a traditional IRA or 401(k) do not get a step-up; heirs pay ordinary income tax on every dollar they withdraw. Gifted property does not step up either; the recipient carries the donor's original basis forward.
Community property states
In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), both halves of community property step up to fair market value at the first spouse's death. That is a larger benefit than the 50% step-up available in common-law states, which makes community property states particularly useful for capital gains planning.
The step-down in basis
The rule cuts both ways. If inherited property has dropped below its original purchase price, the basis steps down to the date-of-death value. Heirs who sell at that lower value have no loss relative to their inherited basis, even though the original owner paid more.
Estate tax and the step-up: the trade-off
The step-up is most valuable when the estate holds appreciated assets but is not large enough to owe significant estate tax. If an estate owes 40% estate tax on the appreciated property and heirs also avoid capital gains through the step-up, the family still loses 40% to estate tax on that amount. The step-up mainly benefits estates below the estate tax threshold or structured to minimize that tax through deductions and exemptions. Use the estate tax calculator and the step-up in basis calculator together to see the full picture.
This article is for educational purposes only and is not tax or legal advice. Tax law on step-up in basis is subject to change. Consult a CPA or estate attorney for your specific situation.
See if your estate owes tax
Enter your estate value, apply the 2026 federal exemption and your state's rules, and get your estimated estate tax in under a minute.