Inheriting assets from a loved one can come with a significant—but often misunderstood—tax benefit known as the step-up in basis. This provision can reduce or eliminate capital gains tax on inherited property. Here's what you need to know.

What Is "Basis" and Why Does It Matter?
Basis generally refers to the original cost of an asset, adjusted over time for things like improvements, depreciation, or returns of capital. When the asset is eventually sold, the capital gain or loss is calculated by subtracting the basis from the sale price.

Upon death, most capital assets receive a step-up (or step-down) based on reflecting their fair market value (FMV) as of the date of death (or an alternate valuation date, six months later, if elected by the estate). This adjustment erases any unrealized gains or losses accrued during the decedent's lifetime.

Example: Your father purchased stock for $50,000. At the time of his passing, the stock is worth $220,000. Your new stepped-up basis is $220,000. There's no taxable gain if you sell the stock for that amount. If you later sell it for $260,000, you only owe capital gains tax on the $40,000 of appreciation since the date of death.

Assets That Don't Qualify for a Step-Up
Not all assets qualify. Common excluded assets include:
     •    Traditional and Roth IRAs
     •    401(k)s and other retirement accounts
     •    Assets gifted during the owner's lifetime (which retain the original, carryover basis)

Key Steps for Heirs
After inheriting assets, consider these steps:
     •    Document the value of each asset as of the date of death using brokerage statements, appraisals, Zillow reports, or crypto exchange data.
     •    Retitle assets into your name or trust promptly to avoid legal and administrative issues.
     •    Maintain thorough records for future sales or potential IRS inquiries.

Smart Moves for Future Estate Planning
If you're planning your estate:
     •    Review assets with low basis that you intend to hold long-term and pass on through inheritance.
     •    Harvest losses strategically to offset gains on other investments that won't benefit from a step-up.
     •    Understand gift tax rules—gifting assets during your lifetime passes along your original basis, which could lead to higher taxes for the recipient than an inheritance.

Final Thoughts
While the step-up in basis offers powerful tax-saving potential, it's important to understand its limits. For example, certain last-minute gifts (sometimes referred to as "deathbed gifts") may still be included in the estate for tax purposes, and some elections (like the alternate valuation date) require careful planning.

If you've recently inherited assets or are working on your estate plan, we're here to help you navigate the tax implications and maximize your opportunities. Contact us to chart the most tax-efficient path forward.