Educational information, not individual financial advice.
Key Takeaways
The step-up in basis is one of the largest (and most debated) tax benefits in U.S. law. It eliminates the capital gains tax on everything the deceased owned, by resetting the basis to the value at the date of death.
Suppose your grandfather bought Apple stock in 1995 for $5,000. At his death in 2026, it's worth $500,000. The unrealized gain is $495,000.
If he had sold the stock the day before he died, he would have owed tax on $495,000 at long-term capital gains rates — $74,250 at 15% or $99,000 at 20%, plus NIIT.
If instead he holds the stock, dies, and leaves it to you, you inherit with a "stepped-up basis" of $500,000. If you immediately sell for $500,000, your gain is zero. The $495,000 of appreciation during your grandfather's lifetime is never taxed.
This is the step-up in basis.
Most assets transferred at death receive a step-up (or step-down, if value has declined):
What does not get a step-up:
The rule of thumb: pre-tax retirement assets are never "gain" to step up; they're deferred ordinary income that heirs must eventually recognize.
In community property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), a surviving spouse gets a "double step-up" on community property — the basis of both halves of jointly owned community property resets at the first spouse's death, not just the deceased spouse's half.
In common-law states, only the deceased spouse's half of jointly owned property gets stepped up. The surviving spouse keeps their original basis on their half.
This makes community property states meaningfully better for estate planning around appreciated assets.
The step-up creates a strong incentive to hold highly appreciated positions rather than sell and rebalance during life. If you're in your 70s and have a large appreciated position, three considerations fight against each other:
The "right" answer depends on many factors, including how much of your wealth the position represents, whether you expect to need the money during life, and charitable intent.
If you want to give to charity, appreciated assets are generally better than cash:
This makes donor-advised funds and direct charitable gifts particularly effective for people with large appreciated positions.
The step-up is often cited as a major loophole in the tax code. Advocates note that it simplifies estate administration and avoids taxing heirs who didn't experience the underlying gain. Critics argue that it lets large amounts of wealth escape income tax entirely, especially for estates below the federal estate tax threshold ($15M per individual in 2026) — which captures only a small fraction of estates.
Various reform proposals (Biden's 2021 American Families Plan, others) have called for eliminating or limiting the step-up. None have passed. The One Big Beautiful Bill Act in 2025 kept the step-up intact while raising the estate exemption.
Horizons accounts for step-up implicitly in the inherited-asset value calculations when modeling estate transfers. In scenarios where a taxable account passes to heirs, the engine assumes the gain is eliminated at death — the beneficiary distribution view reflects this.
| Category | Value | Share |
|---|---|---|
| Sell before death | 50% | |
| Gift during life | 50% | |
| Hold until death | 0% |
Same asset, same appreciation, dramatically different tax outcomes. Step-up eliminates the embedded gain entirely at death for any estate under the $15M federal exemption.
Your parent plans to gift you their highly appreciated stock during their lifetime to 'help you now.' The stock has $5k cost basis and is worth $200k. Why might you push back on the gifting approach?
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