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Planning · Wealth Transfer & Gifting

Step-Up in Basis: The Quiet Engine of Inheritance Planning

The basis step-up is the most valuable tax break most families will ever use, and one of the least understood. It quietly erases a lifetime of unrealized capital gain on assets that pass at death — which is why, for estates under the exclusion, keeping an appreciated asset until death often beats giving it away.

Written by TTA Editorial

Published July 20, 2026 · Last verified July 20, 2026 · Update policy: reviewed at least annually and on change in law; statutory tables re-verified each legislative session

The mechanism

Income tax on an investment is charged on the gain — the difference between what you sell it for and your basis, usually what you paid. When property passes from someone who has died, the heir’s basis is reset to the property’s fair market value on the date of death (IRC § 1014). If a parent bought stock for $50,000 that is worth $500,000 at death, the child’s basis becomes $500,000 — and the $450,000 of lifetime gain simply vanishes for income-tax purposes. Sell it the next day for $500,000 and there is no taxable gain at all.

The whole idea in one line: the income-tax clock on unrealized gain resets to zero at death. Heirs inherit the asset at its current value, not at the decedent’s original cost — and the built-up gain is never taxed.

What gets the step-up

The step-up applies to property “acquired from a decedent,” which in practice means property included in the decedent’s gross estate. That is a wide net: assets held outright, assets in a revocable living trust (included in the estate under IRC § 2038), and most jointly held and inherited property. It is not universal, though. Assets a person gave away into an irrevocable trust during life, and thereby removed from their estate, generally get no step-up — the IRS confirmed as much for irrevocable grantor trusts in Rev. Rul. 2023-2, which we cover in the trust-funding mistakes page. Being in the taxable estate is what earns the step-up.

The community-property double step-up

Married couples in community-property states get a notable advantage. When one spouse dies, both halves of the couple’s community property receive a new basis — not just the deceased spouse’s half (IRC § 1014(b)(6)). In common-law (non-community-property) states, only the deceased spouse’s share of jointly held property steps up; the survivor’s half keeps its old basis. For a couple with a highly appreciated asset in a community-property state, the “double step-up” can erase the entire gain at the first death rather than only half of it — a meaningful, and frequently overlooked, planning point.

What the step-up doesn’t reach

The step-up has real limits, and missing them leads to unpleasant surprises:

  • Income in respect of a decedent (IRD). Assets holding untaxed ordinary income — traditional IRAs and 401(k)s, deferred-annuity gains, unpaid deferred compensation, savings-bond interest — get no step-up. Section 1014 expressly excludes a right to receive IRD (IRC § 1014(c)), so the heir pays ordinary income tax as the money comes out.
  • Gifted assets. Property given away during life carries the giver’s basis (IRC § 1015) rather than stepping up — the core of the gifting-versus-inheriting decision.
  • The alternate valuation date. An estate may in some cases elect to value assets six months after death rather than on the date of death (IRC § 2032); the elected value then sets the basis. It is an estate-level election, not an automatic feature.

Why it can beat the estate tax

For an estate comfortably under the $15 million exclusion, there is no estate tax to avoid — so the planning goal flips from shrinking the estate to keeping assets in it to capture the step-up. Giving a low-basis asset away during life removes it from the estate but forfeits the step-up, handing the recipient a built-in capital-gains bill for a tax the family would never have owed. That trade-off is the single most common wealth-transfer mistake among families below the exemption, and the reason the next page exists.

Sources & methodology

Methodology & sources

Primary sources are cited in place: IRC § 1014, including the community-property rule at § 1014(b)(6) and the IRD exclusion at § 1014(c); § 1015 (carryover basis for gifts); § 2032 (alternate valuation); and § 2038 (revocable-trust inclusion) — all linked to Cornell’s Legal Information Institute — together with Rev. Rul. 2023-2 on irrevocable grantor trusts. See our editorial standards.

This page is educational and is not legal or tax advice. Basis rules interact with state property law and the shape of your estate; use this to understand the mechanism and confirm the application with a qualified professional.

Last verified July 20, 2026.

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Gifting & Wealth Transfer

The two exclusions that do most of the work, the exemption under current 2026 law, and the one idea — basis — that decides whether giving during life beats leaving at death. Every figure cited to the Code and the IRS's 2026 numbers.

Primary-source citedVerified July 20, 202620 minIRC §2503 · §2513

The annual exclusion

The $19,000-per-recipient exclusion for 2026, the present-interest requirement, gift-splitting between spouses, the separate unlimited exclusion for tuition and medical bills paid directly, and the larger allowance for a non-citizen spouse — each cited to the statute and Rev. Proc. 2025-32.

Primary-source citedVerified July 20, 202616 minIRC §2010 · P.L. 119-21

The lifetime exemption

For 2026 the basic exclusion is $15,000,000 per person, made permanent and indexed by the 2025 law. How the unified gift-and-estate exemption works, how portability lets a couple reach $30,000,000, and why the old 'clawback' worry is settled.

Primary-source citedVerified July 20, 202617 minIRC §1015 vs. §1014

Gifting vs. inheriting

Give an appreciated asset during life and your basis carries over to the recipient; leave it at death and the basis steps up. For most families under the $15 million exclusion, that single difference — carryover versus step-up — settles the question. A worked, clearly hypothetical comparison.

Primary-source citedVerified July 20, 202614 minIRC §7872 · §1274(d)

Intra-family loans

A loan to a family member is not a gift — if it charges at least the applicable federal rate the IRS publishes each month. How the below-market-loan rules work, what happens if you charge too little, and where to find the current rate (rather than a figure that goes stale).

Primary-source citedVerified July 20, 202613 min

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