Definition
A step-up in basis is an adjustment under Internal Revenue Code §1014 that resets the cost basis of an inherited asset to its fair market value on the date of the owner’s death. Because capital gains tax is calculated on the difference between the sale price and basis, stepping the basis up to date-of-death value can eliminate the built-in gain that accrued during the decedent’s ownership — meaning an heir who sells near that value may recognize little or no capital gain.
How a Step-Up in Basis Works
The adjustment ties basis to value at death rather than original cost:
- Reset to fair market value. The heir’s basis generally becomes the asset’s value on the date of death, not the decedent’s purchase price.
- Built-in gain eliminated. Appreciation during the decedent’s lifetime may pass to heirs without triggering capital gains tax.
- Recapture relief. Amounts that would have been depreciation recapture can also effectively be eliminated for heirs, subject to the rules.
- Titling matters. How property is owned — jointly, in trust, or as community property — affects whether and how much basis steps up.
Estate Planning Context
The step-up is central to a well-known long-term strategy sometimes called “swap till you drop”: an investor defers capital gains through successive 1031 exchanges during life, then passes the appreciated real estate to heirs who may receive a stepped-up basis at death. This can defer tax across a lifetime and potentially reset basis at inheritance. The availability and size of the step-up depend on titling, applicable law, and the type of asset, so this is a planning concept to work through with an estate attorney and CPA — not a guaranteed outcome.
Key Characteristics
| Feature | Step-Up in Basis |
|---|---|
| Authority | IRC §1014 |
| Trigger | Owner’s death |
| Basis reset | To fair market value at death |
| Effect | May eliminate built-in gain for heirs |
| Recapture | May also be eliminated, with exceptions |
| Depends on | Titling, asset type, applicable law |
Important Considerations
The step-up is powerful but far from automatic in every case: retirement accounts, some irrevocable trusts, and gifted property follow different rules, and jointly held or community property is treated distinctly. Tax law governing basis and estate treatment can change, and coordinating a lifetime deferral strategy with estate documents requires care. This is a legal and tax planning matter — the appropriate approach depends entirely on your circumstances and should be developed with an estate attorney and your CPA.
Related Terms
- 1031 Exchange — pairs with a step-up in lifetime deferral strategies
- Depreciation Recapture — may be eliminated by a step-up
- Opportunity Zone — another capital gains planning concept
This definition is educational only and is not investment, tax, or legal advice. Basis and estate tax rules under §1014 depend on titling and applicable law and can change. Confirm your specific situation with an estate attorney and your CPA.
Thinking About Long-Term Tax Planning?
Discuss how deferral and estate strategies fit together with a qualified advisor.