Inherited Assets
& Stepped-Up Basis
Inheriting assets comes with significant tax implications — particularly around basis. Getting it right protects beneficiaries from paying more tax than they owe.
What is stepped-up basis?
When someone inherits an asset — real estate, stocks, a brokerage account — the cost basis of that asset is generally stepped up to its fair market value as of the date of the decedent's death. This means that if you sell the inherited asset at or near its date-of-death value, you may owe little or no capital gains tax — even if the decedent held it for decades and it appreciated substantially.
This is one of the most valuable and most misunderstood aspects of inheritance tax law. Many beneficiaries — and some preparers — don't apply the step-up correctly, resulting in significantly overstated capital gains and unnecessary tax.
How basis is determined at death
- General rule — basis steps up to fair market value on the date of death
- Alternate valuation date — if the estate elected this on Form 706, basis is determined six months after death
- Community property — in community property states, both halves of community property receive a step-up at the death of either spouse, not just the decedent's half
- Joint tenancy — only the decedent's share receives a step-up; the surviving joint tenant's original basis in their share is unchanged
- IRAs and retirement accounts — these do NOT receive a step-up; inherited retirement accounts are subject to income tax when distributed
- Assets in a revocable trust — generally receive a step-up just as probate assets do
- Gifted assets — assets gifted before death carry the donor's original basis, not a step-up
Selling inherited property
When a beneficiary sells inherited property, the holding period is automatically treated as long-term regardless of how long the beneficiary actually held the asset — meaning the lower long-term capital gains rates apply even if the property is sold the day after inheriting it.
The gain or loss is calculated as the difference between the sale proceeds and the stepped-up basis — not the original purchase price. We coordinate with the estate's records and appraisals to establish the correct basis figure before any return is prepared.
Basis tracking when an estate has multiple assets
When an estate distributes multiple assets to multiple beneficiaries, or when assets are sold by the estate during administration, tracking the correct basis for each asset and each beneficiary requires careful coordination between the estate's Form 1041, the beneficiaries' K-1s, and the individual returns. We handle all of this as part of a coordinated engagement.
What we need to get started
- Date of death for the decedent
- Description and date-of-death value of inherited assets (appraisals for real estate or closely-held interests)
- Form 706 if one was filed (contains the estate's asset valuations)
- Documentation of assets sold — sale date, proceeds, and selling expenses
- Prior year tax return for the beneficiary
Frequently Asked Questions
What is stepped-up basis?
When you inherit an asset, your tax basis is generally 'stepped up' to the asset's fair market value on the date of the decedent's death. This means any appreciation during the decedent's lifetime is never subject to income tax — only gains after the date of death are taxable when you sell.
Does stepped-up basis apply to inherited IRAs?
No. Traditional IRA distributions are taxed as ordinary income regardless of when the original owner contributed the funds. The step-up in basis applies to assets like stocks, real estate, and other property — not to tax-deferred retirement accounts.
How do I determine the date-of-death value?
For publicly traded securities, use the mean of the high and low prices on the date of death. For real estate or other non-liquid assets, a qualified appraisal as of the date of death is typically required.