The step-up in basis is one of the most valuable and least understood rules in the U.S. tax code. It's the reason Buy, Borrow, Die works, and it has a big effect on whether you sell appreciated assets during your lifetime or leave them to heirs.
First, what is "basis"?
Your cost basis is generally what you paid for an asset, plus certain costs such as improvements to real estate. When you sell, your taxable capital gain is the sale price minus your basis. Buy stock for $50,000, sell it for $200,000, and your gain is $150,000.
What the step-up does
When someone inherits an asset, their basis is generally reset to the asset's fair market value on the date of the original owner's death, under Section 1014 of the Internal Revenue Code. The gain that built up during the owner's lifetime is never taxed as a capital gain.
A worked example
A parent bought shares for $200,000 decades ago. They're worth $900,000 today, an unrealized gain of $700,000.
- If the parent sells before death: at a 15% long-term capital gains rate, the tax is about $105,000. At 18.8% (15% plus the 3.8% net investment income tax for higher earners), it's about $131,600, plus any state tax.
- If the child inherits and sells shortly after: the child's basis is about $900,000, so selling at that price creates little or no gain and little or no capital gains tax.
If the child holds on and the shares later grow to $1,000,000, only the $100,000 of growth after the inheritance is taxable. Inherited assets are generally treated as long-term holdings no matter how long the heir has owned them.
2026 capital gains rates for context
For 2026, per IRS inflation adjustments, long-term capital gains are taxed at 0%, 15% or 20% depending on taxable income:
| Rate | Single | Married filing jointly |
|---|---|---|
| 0% | Up to $49,450 | Up to $98,900 |
| 15% | $49,451 – $545,500 | $98,901 – $613,700 |
| 20% | Over $545,500 | Over $613,700 |
Source: IRS Rev. Proc. 2025-32. The 3.8% net investment income tax can also apply above $200,000 of modified AGI for single filers and $250,000 for joint filers. These thresholds aren't indexed for inflation. State taxes are extra in most states.
Community property states
In community property states, such as California, Texas, Arizona and Washington, a surviving spouse can generally receive a step-up on both halves of community property when the first spouse dies, not just the deceased spouse's half. In other states, typically only the deceased spouse's share steps up. How assets are titled matters, so this is worth reviewing with an estate attorney.
Common misconceptions
- "Gifting assets to my kids now is the same." It isn't. Gifts during your lifetime generally carry over your original basis. The child inherits your unrealized gain, with no step-up.
- "Retirement accounts get a step-up." Traditional IRAs and 401(k)s don't. Heirs pay ordinary income tax on withdrawals, generally under the 10-year distribution rule for most non-spouse beneficiaries.
- "Step-up means no tax at all." It removes capital gains tax on pre-death growth. Estate taxes are a separate system. For 2026 the federal exemption is $15 million per person, but some states tax estates at much lower levels.
- "It works for losses too." Basis can step down as well. An asset worth less than its purchase price at death loses the potential tax loss.
Why it matters for your planning
If you hold highly appreciated assets you don't need to spend, there can be a large tax difference between selling them in your lifetime and leaving them to heirs. That's the core of Buy, Borrow, Die. The trade-off is that holding and borrowing carries its own risks. Our calculator estimates the gain erased at death under your assumptions.
Frequently asked questions
How do heirs prove the stepped-up value?
For publicly traded securities, the value on the date of death is usually easy to document. Brokerages typically update the basis. For real estate and private businesses, an appraisal as of the date of death is common.
Could the step-up in basis be eliminated?
It has been the subject of repeal proposals before, and tax law can change. Any long-term plan that depends on it should be reviewed periodically.