Estate Planning · 6 min read · 2026-03-31
The 9-step step-up basis strategy.
Stepped-up basis is the largest tax break in the IRC for transferring wealth. Most heirs leave significant value on the table.
The largest tax break in the IRC, frequently misused.
Section 1014 of the IRC steps the basis of inherited assets up to fair market value at the date of death. The embedded capital gain is wiped out. For long-tenure holdings with significant appreciation, the step-up can save 20 to 37 percent of the gain in federal tax alone. The strategy is to preserve the step-up by holding the right assets in the right ownership structures.
The nine indicators
The nine planning moves around step-up.
Each is a deliberate ownership or asset-location decision made before death. Together they preserve the step-up that retail commonly forfeits.
Hold appreciated assets through death rather than sell
Pattern: never realize
Selling appreciated assets during life realizes the gain. Holding through death wipes it out via step-up.
Avoid JTWROS for high-appreciation assets
Pattern: only half steps up
Joint tenancy with rights of survivorship steps up only the deceased's half. Sole ownership or community property steps up the full asset.
Use TOD/POD designations for clean transfer
Pattern: probate avoidance
Transfer-on-death registrations avoid probate while preserving step-up. Brokerage-level TOD is operationally simple.
Community-property states get full step-up on shared assets
Threshold: married, CP state
In community-property states (CA, TX, AZ, NM, NV, ID, LA, WI, WA), shared appreciated assets get full step-up at first spouse's death — not just half.
Keep tax-deferred assets in IRAs, taxable in brokerage
Asset location: appreciation outside IRA
IRA assets get NO step-up. Appreciated equities should live in taxable accounts where the step-up applies.
Avoid large lifetime gifts of appreciated assets
Pattern: gifts carry basis
Lifetime gifts transfer at the donor's basis. Recipients sell with the embedded gain. Death transfers via step-up; gifting does not.
Roth IRAs get no step-up either, but no tax
Pattern: tax-free regardless
Roth IRAs have no step-up at death because they have no embedded tax. The 10-year inherited-Roth rule still applies.
Document fair market value at death
Method: 706 appraisal
FMV at death establishes the new basis. For non-publicly-traded assets, qualified appraisals are required to support the basis.
Consider alternate valuation date election
Threshold: 6 months later
Estates can elect alternate valuation date 6 months post-death if it lowers estate tax. Affects both estate tax and beneficiary basis.
What the step-up does
When a U.S. taxpayer dies, the basis of capital assets in their estate is generally adjusted to fair market value as of the date of death (or 6 months later, if the alternate valuation date election is made). The embedded capital gain at death is wiped out — the heir takes the asset with a new basis equal to FMV.
The implications are large. A holder who bought $10,000 of stock 30 years ago, watched it grow to $200,000, and held it until death passes that stock to heirs with a $200,000 basis. The $190,000 of appreciation is never taxed. The same holder who sold the stock during life owes capital-gains tax on the gain. The decision to hold versus sell appreciated assets, particularly late in life, is structurally biased toward holding because of step-up.
Joint tenancy is the most common step-up trap
Joint tenancy with rights of survivorship is the most common ownership structure for married couples in non-community-property states. JTWROS provides probate avoidance, but it produces only a partial step-up at the first death — only half of the asset's basis is adjusted. The other half retains its original basis.
For couples in community-property states, equivalent shared property gets a full step-up at the first death. The community-property structure is dramatically more favorable for high-appreciation assets. Many states (Alaska, Tennessee, others) offer opt-in community-property arrangements that capture the full step-up benefit even outside historically community-property states.
Asset-location implications
Assets inside traditional IRAs, 401(k)s, and similar tax-deferred accounts do not receive a step-up at death. The pre-tax balance is taxed as ordinary income to the heir under the 10-year payout rule (post-SECURE Act). Assets inside Roth IRAs do not receive a step-up either, but they have no embedded tax.
The asset-location implication is that highly-appreciated equities should be held in taxable brokerage accounts where the step-up applies. Tax-inefficient assets (REITs, high-turnover funds, taxable bonds) should be held in tax-deferred accounts. The full optimization is more complex, but the step-up rule reinforces the standard asset-location guidance.
What the step-up does not protect
Income in respect of a decedent (IRD) — most importantly traditional IRA balances — is not stepped up. The heir pays ordinary income tax on the inherited IRA balance during the 10-year payout window.
Step-up also does not eliminate the federal estate tax on estates above the exemption ($13.61 million per individual in 2024, scheduled to revert to approximately $7 million in 2026 absent extension). Estate tax planning at high net worth requires separate strategies — credit-shelter trusts, GRATs, charitable remainder trusts — that are beyond the simple step-up planning here.
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Common questions
Questions.
Does step-up apply to all inherited assets?
Most capital assets — stocks, real estate, collectibles. Exceptions include traditional IRAs, 401(k)s, annuities, and other IRD assets.
What about gifted assets?
Gifts during life carry the donor's basis. The recipient owes tax on the embedded gain when they sell. Death transfers preserve step-up; lifetime gifts do not.
Will Congress repeal the step-up?
Periodically proposed (Build Back Better, 2021). No major reform has passed. Current law is stable but not guaranteed.
How does the basis get reported?
Brokerages step up the basis automatically on death-of-account-holder events. For private assets, qualified appraisals support the new basis.
Is step-up available for jointly-held real estate?
Yes, with the same JTWROS half-step-up issue. Tenants-in-common ownership separates the step-up by ownership share.
What about life insurance proceeds?
Life insurance death benefits are received income-tax-free under different rules (Section 101). Step-up is not the relevant mechanism.
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