What Is a Step-up in Basis, and How Can It Help You at Death?

Step-up in basis FAQs

Is it better to inherit stock or cash?

It depends on your financial goals, but from a tax perspective, inheriting stock is often more tax-efficient than inheriting cash. That’s because inherited stocks typically receive a step-up in basis, which resets the cost basis to the asset’s fair market value as of the date of death. This means you may owe little or no capital gains tax if you sell the stock soon after inheriting it.

Cash, on the other hand, provides immediate liquidity, which can help pay expenses or settle debts, but it offers no tax advantages. So when weighing “is it better to inherit stock or cash,” the right answer depends on your needs, but stock often comes with built-in tax benefits.

Can an asset get a "step-down" in basis?

Yes. While most people focus on step-ups, a step-down in basis is also possible. This happens when the asset's fair market value at the date of death is less than the original purchase price. In this case, the cost basis is adjusted downward, which can result in higher capital gains taxes when the beneficiary eventually sells the asset.

For example, if someone purchased a property for $500,000 and it’s worth $400,000 at death, the beneficiary’s basis would be $400,000. This is known as a step-down in basis, and while it’s less common, it’s a disadvantage to be aware of.

What are the rules for property held in an LLC?

If property is held in an LLC, the ownership interest in the LLC, not the underlying real estate, is what gets passed on. The step-up in basis applies to the membership interest in the LLC, not necessarily the property itself.

Property in an LLC gets a stepped-up basis, yes, but with complexity. A stepped-up basis may apply to the LLC shares, but not directly to the underlying asset unless the LLC is dissolved or the structure allows for a basis adjustment inside the entity. It's best to consult a tax advisor for these situations, as LLC taxation can involve multiple tax code provisions.

What are TOD accounts, and how do they relate to step-up in basis?

TOD accounts allow assets to pass directly to a named beneficiary without going through probate. These are often used for brokerage accounts, bank accounts, or mutual funds.

If you’ve seen terms like “what is a TOD account” or “joint WROS TOD,” it refers to how financial institutions handle these transfers. The good news is that assets in TOD accounts generally qualify for a step-up in basis. The beneficiary receives the asset at its fair market value on the date of death, just like with other inherited assets.

However, beneficiaries should request date-of-death valuations and check how the account was titled to confirm eligibility.

What is the difference between cost basis and stepped-up basis?

The cost basis of an asset is typically the original purchase price, plus certain adjustments like improvements or commissions. This number is used to calculate capital gains or losses when the asset is sold.

A stepped-up basis is a special reset of the cost basis that applies when an asset is inherited. It changes the basis to the asset’s fair market value at the date of death. This can significantly reduce or eliminate capital gains tax if the asset is sold shortly afterwards.

Do I have to pay capital gains on inherited property?

You only pay capital gains tax if you sell the inherited property for more than its stepped-up basis. Since the basis resets to fair market value at the time of death, many heirs owe little or no tax if they sell the asset promptly.

For example, capital gains on an inherited house would only apply if the sale price exceeds the stepped-up basis. The same goes for taxes on inherited stocks. Keep in mind that any gain beyond the date-of-death value is taxable, and it will be taxed at long-term capital gains rates, regardless of how long you hold the asset.

Can you get a step-up in basis on a gifted asset?

No. Gifts do not receive a step-up in basis. Instead, the recipient inherits the donor’s original cost basis. This is often called a carryover basis.

This difference between gifts and inheritances is important in tax planning. If you gift a stock purchased for $10,000 that is now worth $50,000, the recipient assumes your $10,000 basis. If they sell it, they may owe capital gains on $40,000. However, if the same person inherits the stock, the basis would step up to $50,000, potentially eliminating any taxable gain if the stock is sold soon after.

What is the six-month rule for step-up in basis?

The six-month rule refers to the IRS’ alternate valuation date. In some cases, the executor can elect to value the estate’s assets six months after the date of death, but only if it results in lower estate taxes. This doesn’t affect the beneficiary’s basis unless the alternate valuation is officially elected.

So while it’s a helpful estate tax strategy in some cases, the six-month rule for step-up basis doesn’t automatically apply; you must opt in and meet IRS conditions.