What is a step- up basis?

Sep 08, 2023

When it comes to understanding taxes and estate planning, there are many terms and concepts that can be confusing. One such concept is the step-up basis. In this blog post, we will delve into what a step-up basis is and how it can impact your taxes and financial planning.

What is a Step-Up Basis?

A step-up basis refers to the adjustment of the cost basis of an asset to its fair market value at the time of inheritance. In simpler terms, when you inherit an asset, such as real estate or stocks, the value of that asset is "stepped up" to its current market value. This new value becomes the cost basis for the asset, which is used to calculate capital gains taxes when the asset is sold.

Why is it Important?

The step-up basis is important because it can help minimize the capital gains tax liability for the heirs. Capital gains tax is typically calculated based on the difference between the sale price of an asset and its original cost basis. By stepping up the basis to the fair market value at the time of inheritance, any appreciation in the value of the asset that occurred before the inheritance is effectively excluded from the capital gains tax calculation.

How Does it Work?

Let's say you inherit a piece of property from a relative. The original cost basis of the property was $200,000, but its current fair market value is $500,000. If you were to sell the property for $550,000, your capital gain would be $350,000 ($550,000 - $200,000). However, with a step-up basis, your new cost basis would be $500,000, resulting in a capital gain of only $50,000 ($550,000 - $500,000).

step-up basis

Exceptions and Limitations

While the step-up basis is generally beneficial for heirs, there are some exceptions and limitations to be aware of. For example, if you receive an asset as a gift rather than through inheritance, the cost basis remains the same as the original owner's. Additionally, certain assets, such as retirement accounts and annuities, may have different rules regarding the step-up basis.

Planning Considerations

Understanding the step-up basis is crucial for effective estate planning. Here are a few considerations to keep in mind:

  1. Consult with a tax professional or financial advisor to fully understand the implications of step-up basis on your specific situation.
  2. Consider the timing of inheritances and potential tax implications when making decisions about selling or transferring assets.
  3. Keep accurate records of the original cost basis of assets to facilitate the step-up basis calculation.
  4. Explore strategies such as gifting assets during your lifetime to take advantage of the step-up basis for your heirs.

Remember, tax laws can change, so it's important to stay informed and review your estate plan periodically to ensure it aligns with your goals and the current regulations.


The step-up basis is a valuable tool for minimizing capital gains taxes for heirs. By understanding how it works and considering it in your estate planning, you can potentially pass on more of your assets to your loved ones. As always, consult with professionals to ensure you make the most informed decisions for your financial future.