What happens if I inherit assets and they have declined in value since the original owner purchased them?

If the fair market value at death is less than the original owner’s basis, you receive a step-down in basis — your basis is the lower FMV at death. This limits future loss deductions to the post-inheritance decline. There is no ability to use the original owner’s loss; you inherit the current value as the starting point.

Is there an alternate valuation date for step-up purposes?

Yes. The executor of an estate may elect the Alternate Valuation Date — 6 months after the date of death — if this election reduces both the gross estate value AND the estate tax. Using the alternate date also changes the basis for all inherited assets to their value on that date. This election affects all assets equally; you cannot pick and choose which assets use which date.

Does the step-up apply to assets in a revocable living trust?

Yes. Assets in a revocable living trust are part of the grantor’s estate and receive a stepped-up basis at the grantor’s death. This is a primary advantage of revocable trusts for estate planning — they still receive the full step-up without going through probate. Irrevocable trusts and assets transferred out of the estate before death do not receive the same step-up treatment.

Will the step-up in basis be eliminated by future legislation?

It has been proposed multiple times in Congress (most notably in the American Families Plan proposal in 2021) but has not been enacted as of 2025. The step-up remains current law. Estate planning should account for the possibility of future changes — strategies that work well with the step-up (like holding appreciated assets for life) may need reevaluation if legislation passes.

How does the step-up interact with the estate tax?

The step-up applies regardless of whether the estate is large enough to owe estate tax. Most estates (under $13.99 million per person in 2025, $27.98 million for married couples) owe no federal estate tax. But all estates, regardless of size, pass assets with stepped-up basis to heirs. The step-up benefit accrues to heirs of estates of all sizes.

Step-Up in Basis on Inherited Assets: How Inherited Property Avoids Capital Gains

The step-up in basis is one of the most valuable provisions in the US tax code for investors — it permanently eliminates all capital gains tax on appreciation that occurred during the original owner’s lifetime. When you inherit appreciated assets, your basis is reset to the fair market value at the date of death, erasing decades of potential taxable gain. Understanding this rule helps families make informed estate planning decisions.

How the Step-Up in Basis Works

Step-up in basis impact — inherited vs gifted assets

Scenario	Original Owner’s Basis	FMV at Death	Heir’s Basis	Taxable Gain if Heir Sells Immediately
Stock bought for $10K, worth $80K at death	$10,000	$80,000	$80,000 (stepped up)	$0
Real estate bought for $200K, worth $800K at death	$200,000	$800,000	$800,000 (stepped up)	$0
Business interest: $50K basis, $1.2M at death	$50,000	$1,200,000	$1,200,000 (stepped up)	$0
Without step-up (gift instead)	$10,000 (carryover)	—	$10,000	$70,000 gain taxable on eventual sale

What Receives the Step-Up (and What Does Not)

Does receive step-up: Stocks, bonds, real estate, business interests, artwork, and other investment assets held outside retirement accounts
Does receive step-up: Joint tenancy property — the decedent’s half gets stepped up
Does NOT receive step-up: Traditional IRAs, 401(k)s, 403(b)s — distributions are still ordinary income regardless of basis
Does NOT receive step-up: Roth IRAs — but they were already tax-free, so no step-up needed
Does NOT receive step-up: Assets already transferred by gift during lifetime (gift basis carries over)
Special case: Community property states — BOTH halves of community property receive a step-up, even the surviving spouse’s half

📈The Value of the Step-Up for Appreciated Estates

A family that inherited a $3 million stock portfolio with a $300,000 original cost basis in 2024 paid zero capital gains tax on the $2.7 million in appreciation — permanently forgiven. At a 15% federal capital gains rate plus 5% state, this represents $540,000 in tax that would have been owed without the step-up. The step-up is worth this amount to the heirs.

Estate Planning Implications of the Step-Up

The step-up incentivizes holding highly appreciated assets until death rather than selling them during life. For investors in the 15-20% capital gains bracket with large appreciated positions, the lifetime tax saving from never selling until death can be enormous — particularly for real estate investors using 1031 exchanges throughout their investing career, terminating in a final step-up at death.

Calculate the Capital Gains Impact of Inherited Assets

Enter the original basis and inherited fair market value to see the step-up and any capital gains if sold at different prices.

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Frequently Asked Questions

Step-Up in Basis on Inherited Assets: How Inherited Property Avoids Capital Gains

How the Step-Up in Basis Works

What Receives the Step-Up (and What Does Not)

Estate Planning Implications of the Step-Up

Frequently Asked Questions

Frequently Asked Questions

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