Updated June 17, 2026
A parent buys stock for $20,000. Thirty years later they die, and the stock is worth $500,000. Had they sold it the week before, $480,000 of gain would have been taxable. Instead, their heir inherits it with a basis of $500,000, sells it the same week, and owes nothing on that gain at all. That's the step-up in basis: a reset of an inherited asset's cost basis to its value on the date of death, and it can be worth more than the estate tax question itself.
What the reset actually does to the math
Back to that inherited stock. Sell it right away at $500,000 and the capital gain is zero. Wait a year and sell for $510,000, and only the $10,000 of appreciation that happened after death is taxable, not the $490,000 that happened before it. The decedent's original $20,000 purchase price simply stops mattering for tax purposes.
What qualifies for the step-up
The step-up applies to property in the decedent's gross estate: individually owned assets, community property (a full 100% step-up in community property states), jointly held property with a non-spouse (a 50% 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 withdrawal. Gifted property also does not step up. The recipient carries the donor's original basis forward, gains and all.
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 an advantage for capital gains planning in those states.
The step-down in basis
The rule cuts both ways. If inherited property has declined 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 to claim relative to the 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 stays below the estate tax threshold. If an estate owes 40% estate tax on appreciated property, the family still loses 40% even though the step-up eliminates capital gains. The step-up is most powerful for estates that avoid estate tax through exemptions, deductions, or planning. Use the estate tax calculator and the step-up in basis calculator together to see the complete picture.
An educational explainer, not tax or legal advice. Congress has floated changes to this rule before and could again. Confirm current treatment with a CPA or estate attorney before relying on it.
Put your own numbers through it
Enter what was paid, what it's worth now, and what it sold for, and see the capital gains tax the reset actually saves.