Step-up in basis

Explanation

Under current federal law, assets that pass at death generally receive a new cost basis equal to their fair market value on the date of death (or, if the estate elects it, the alternate valuation date six months later). Heirs who sell soon afterward owe little or no capital gains tax. Inherited assets are also treated as long-term holdings automatically.

Important details:

• It can be a step-down. Assets worth less than their basis at death get a lower basis, and the loss is lost.
• Retirement accounts do not get a step-up. Inherited traditional IRAs and 401(k)s remain fully taxable to the beneficiary as ordinary income, usually within 10 years. Roth accounts stay tax-free if their rules are met.
• Jointly owned property: for spouses in common-law states, typically only the deceased spouse’s half is stepped up. In community property states, both halves can be stepped up at the first spouse’s death.
• Gifts during life do not get a step-up; the recipient generally takes the giver’s original basis.
• Estate tax is separate. The federal estate tax exemption is $15 million per person for 2026 (indexed afterward), so most estates owe none, but some states have much lower thresholds.

The step-up has been proposed for repeal or limitation more than once. It is current law, but long-term plans that depend on it carry legislative risk.

In scenarios, the app can show what heirs would receive with and without the step-up, and it is what makes the buy-borrow-die comparison work: a loan can be repaid from assets whose gains were never taxed.

Example

Your parent bought shares for $100,000 decades ago. They are worth $900,000 when your parent dies, and you inherit them.

• Your basis: $900,000
• If you sell at $900,000: gain = $0, tax = $0

If your parent had sold the shares just before death:

• Gain: $900,000 − $100,000 = $800,000
• Tax at 15%: $120,000; at the top 20% rate plus 3.8% NIIT, $800,000 × 23.8% = $190,400, plus any state tax