The landscape · Investing and taxes
The step up in basis at death
Property inherited from a person who has died takes a new cost basis equal to its value on the date of death, so the gain built up during the owner's life is never taxed as income.
Who this exists for. This applies when a person inherits stock, a home, or other property from someone who has died. Ticks that show it: I hold investments outside retirement accounts; I inherited a retirement account; I am 65 or older; I own my home.
How it works
When an owner dies, the basis of property in the estate resets to fair market value on the date of death. An heir who sells soon after owes little or no capital gains tax, and any gain is treated as long term no matter how long either person held it. The rule covers stock, funds, real estate, and most property held in a taxable account, but not retirement accounts, annuities, or other income the owner had not yet been taxed on, which the heir pays tax on as it comes out. Property held jointly by spouses gets a step up on the half that belonged to the deceased spouse in most states, and on the whole property in community property states. Property given away during life carries the giver's old basis instead.
What it gives
Decades of gain on a long held stock or home are wiped out for income tax when the owner dies.
The heir's holding period is always long term.
In a community property state the whole of a couple's jointly held property steps up at the first death.
What it costs, or where the catch is
Retirement accounts get no step up, and every dollar an heir withdraws is taxed as income.
A gift made during life carries the old basis, so giving away a winner before death hands the heir the tax bill.
A loss on property that fell in value is also erased, since the basis steps down as well.
A worked example
Reuben's father bought a house for $80,000 and shares for $15,000 decades ago, and at his death they are worth $450,000 and $120,000. Reuben's basis becomes $450,000 and $120,000. He sells the shares the next month for $122,000 and owes tax on only $2,000 of gain. Had his father given him the shares the year before he died, his basis would have been $15,000 and the gain $107,000, since $122,000 minus $15,000 is $107,000.
Where it goes wrong
The common miss is a parent transferring the house to a child during life to simplify things, which gives up the step up and hands the child the whole gain.
Who confirms it for you
For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.
The official source
IRS Publication 551, Basis of Assets. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.
Ask about The step up in basis at death
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Nearby doors
- The employee stock purchase plan discount
This exists for a worker whose employer offers an employee stock purchase plan that sells company shares at a discount through payroll.
- The early withdrawal penalty and its exceptions
This applies when a person under 59 and a half takes money out of an IRA, since the withdrawal is taxed and usually carries a 10 percent addition unless one of the listed exceptions fits.
- Inherited IRAs and the ten year rule
This exists for anyone who inherits an IRA or workplace plan balance, and the rules differ for a spouse, a minor child, and most other heirs.
- I bonds and Treasury bills through TreasuryDirect
This exists for a person holding cash they do not need for a while, who wants to know what the Treasury sells directly to individuals.
- FDIC and NCUA insurance limits and ownership categories
This exists for anyone with money in a bank or credit union, and especially for a person whose balances at one institution are approaching the insured amount.
- The home office deduction, simplified and regular
This exists for a self employed person who uses part of their home regularly and exclusively for business, and it is not available to employees working from home.
Education, not advice. Wealthy Habitat explains how rules work and never recommends what to do with your money. The No Advice Disclosure.