Step-Up in Basis 2026: How Inherited Stocks and Investments Avoid Capital Gains Tax

A parent buys 1,000 shares of Apple for $20,000 in 2005. By the time they pass away in 2026, those shares are worth $320,000. If you inherit them and sell, your capital gains tax is zero — not on $300,000 in gain, but zero. That's the step-up in basis. It's the single largest tax break available to most affluent American families, and understanding it shapes how you should handle inherited assets, how you should structure your own estate, and what to never gift during your lifetime.

How IRC §1014 Works: The Rule in Plain Terms

Under Internal Revenue Code §1014, the tax basis of property inherited from a decedent is reset to its fair market value (FMV) on the date of death.¹ This is called the "stepped-up basis." If the asset rose in value during the decedent's lifetime, the gain accumulated over those years simply disappears — it is never taxed.

Two additional rules make the step-up even more powerful:

• Automatic long-term treatment. Under IRC §1223(11), inherited property is automatically treated as held for more than one year, regardless of how long you actually hold it. Sell one day after inheriting and you still get long-term capital gains rates — currently 0%, 15%, or 20% depending on your income, not the 37% short-term rate.
• Step-down also applies. If an asset lost value during the decedent's lifetime, the basis steps down to the lower FMV. Selling at that lower FMV still produces no gain — but you also can't claim the loss that accrued during the decedent's lifetime.

What Assets Get Stepped-Up Basis

The step-up applies to any capital asset included in the decedent's taxable estate. That includes:

• Taxable brokerage accounts — individual stocks, ETFs, mutual funds, bonds
• Directly held real estate — primary residence, rental properties, land, vacation homes
• Business interests — S-corp stock, LLC membership interests, partnership interests
• Collectibles, artwork, precious metals
• Treasury bonds, corporate bonds, CDs (but accrued interest remains ordinary income)

The key: the asset must pass through the estate (i.e., it was owned outright or jointly by the decedent and transfers at death).

What Does NOT Get Stepped-Up Basis

Several important asset categories are excluded from §1014 step-up treatment:

Traditional IRAs and 401(k)s — "Income in Respect of a Decedent" (IRD)

This is the most critical exception. Retirement account balances — traditional IRAs, 401(k)s, 403(b)s, SEPs, SIMPLEs — are considered Income in Respect of a Decedent (IRD) under IRC §691. The decedent never paid income tax on contributions or growth, so the beneficiary owes ordinary income tax on every dollar withdrawn. There is no step-up on these accounts.

This is why a $500,000 traditional IRA and a $500,000 taxable brokerage account are not the same inheritance. The IRA will be taxed at ordinary income rates as distributions are taken (often 22%–32% plus state tax); the brokerage account gets a full step-up and sells at essentially zero gain.

→ See our Inherited IRA guide for T.D. 10001 annual RMD rules and the 10-year distribution window.

Roth IRA and Roth 401(k)

Roth accounts don't get a formal step-up — but they don't need one. Contributions are after-tax, and qualified withdrawals are completely tax-free. As a beneficiary, you'll eventually withdraw the funds tax-free regardless of how much the account grew. The 10-year rule applies (see Inherited IRA guide), but income tax is not a concern on qualified Roth distributions.

Annuities (Non-Qualified)

The gain inside a non-qualified annuity is IRD, taxed as ordinary income when the beneficiary withdraws. No step-up on the earnings portion.

Savings Bonds (EE and I Bonds)

Accrued but unreported interest on savings bonds is IRD — taxable as ordinary income. The principal portion (what was paid for the bond) gets a step-up to face value, but the interest does not.

Joint Property and the Community Property Advantage

How much gets stepped up depends on how the property was titled and whether you live in a community property state.

Common Law States (Most of the U.S.)

For joint tenancy with right of survivorship (JTWROS) — common for married couples in common law states — only the decedent's half-interest receives a step-up at death. The surviving spouse's half retains its original basis.

Example: Couple owns a stock portfolio worth $1,000,000 with a $200,000 original basis in a common law state. Spouse dies. The half attributed to the decedent ($500,000 FMV with $100,000 original basis) steps up to $500,000. The surviving spouse's half retains the $100,000 basis. Total new basis: $600,000 on a $1M portfolio.

Community Property States (AZ, CA, ID, LA, NV, NM, TX, WA, WI)

In community property states, the entire community property receives a step-up at the first spouse's death — not just the decedent's half. This is sometimes called the "double step-up."

Same example in California: The entire $1,000,000 portfolio steps up to $1,000,000 basis. The surviving spouse's capital gains tax exposure on that portfolio drops to zero — a $180,000 tax savings compared to the common law outcome (estimated at 15%–20% LTCG + NIIT on the $700,000 gain that steps up in CP vs. only $400,000 in common law).

Step-Up Tax Savings Calculator

Enter the inherited asset's value and the original purchase price. The calculator shows how much federal capital gains tax the step-up eliminates — what you would have owed if the asset had been sold the day before death.

What to Do With an Inherited Taxable Brokerage Account

The step-up creates an immediate decision window. Here's a practical framework:

1. Get a Date-of-Death Valuation First

Before selling anything, confirm the stepped-up basis. The custodian (Schwab, Fidelity, Vanguard, etc.) should provide a letter or cost-basis update showing the date-of-death FMV for each position. Keep this documentation permanently — the IRS can challenge basis claims years later.

If the account was at a small broker or held physical stock certificates, you'll need a professional appraisal for non-publicly traded assets.

2. You Can Sell Immediately with Near-Zero Capital Gains

If you sell inherited publicly-traded securities shortly after the date of death, the only taxable gain is the movement between the date-of-death value and your sale price. In most cases this is modest — a few percent at most. The decades of compounded appreciation before the inheritance are completely sheltered by the step-up.

This is often the right move if: you want a different asset allocation, the inherited portfolio is concentrated in a single stock, or you plan to reinvest the proceeds differently. Selling a concentrated inherited position is one of the clearest-cut cases for acting quickly.

→ See our concentrated stock guide for how to handle a large inherited position.

3. If You Hold, Your New Basis Is the Step-Up Value

If you keep the inherited positions, your cost basis going forward is the date-of-death FMV. Future gains — from appreciation after the inheritance date — are taxable normally. So an inherited stock worth $100 at death that grows to $130 before you sell has $30 of taxable gain, not $100.

Make sure the custodian has updated the cost basis in your account correctly. If the inherited account transfers to you in-kind, the basis update sometimes requires a phone call or form to confirm it was applied.

4. Donating Inherited Appreciated Stock Doubles the Benefit

If you donate inherited appreciated stock to charity or a donor-advised fund (DAF), you get a deduction for the full FMV (the stepped-up value) and owe zero capital gains tax — because the step-up already eliminated the pre-death gain, and the post-death gain is gifted rather than sold.³

→ See our DAF guide for how to maximize the deduction with appreciated assets.

5. Check the IRMAA and ACA Implications Before a Large Sale

Even with step-up, there may be a small taxable gain if the asset appreciated between the date of death and your sale. If that gain — combined with your other income — pushes your MAGI over $218,000 (MFJ) or $109,000 (single), it can trigger IRMAA Medicare surcharges two years later. Check the timing before you sell a large inherited position in a year when you're near these thresholds.

→ See our IRMAA guide and capital gains tax guide.

Estate Planning Implications: The "Hold Until Death" Strategy

The flip side of the step-up is one of the most powerful — and most underused — estate planning strategies available to wealthy families: holding appreciated taxable assets until death rather than selling or gifting them during your lifetime.

Never Gift a Highly Appreciated Asset During Your Lifetime

When you gift an asset during your lifetime, the recipient takes your carryover basis (IRC §1015). If your Apple stock has a $20,000 basis and you gift $320,000 of it, the recipient owes capital gains tax on $300,000 when they sell — at their tax rate. The gain survives the gift.

But if you hold the same stock until death, the basis steps up to $320,000 and the $300,000 gain disappears forever. The math is stark:

The rule of thumb: gift cash or high-basis assets; hold low-basis assets until death. Gift the $100K cash; keep the $100K in Apple stock you've held since 2005.

The "Borrow, Don't Sell" Strategy

If you need liquidity from a large appreciated taxable position — but don't want to realize gains and lose the eventual step-up — a pledged asset line (PAL or SBLOC) lets you borrow against the portfolio without triggering a taxable event. The plan: hold the appreciated assets through your estate, get the step-up, and the debt is paid from the stepped-up estate.

This is a legitimate strategy, but it has risks (margin calls, interest costs, estate liquidity). → See our pledged asset line guide.

The Estate Exemption is Now $15M (OBBBA)

Under the One Big Beautiful Bill Act (OBBBA, P.L. 119-21, 2025), the federal estate, gift, and GST exemption was permanently raised to $15 million per person ($30M per couple).⁴ For the $1M–$5M audience, this means no federal estate tax on virtually any estate you're likely to accumulate — but you still benefit enormously from the step-up. The step-up applies whether or not your estate owes estate tax. It is not limited to estates that file Form 706.

→ See our estate planning guide and irrevocable trust guide for full estate planning context.

Common Mistakes to Avoid

• Selling before confirming the stepped-up basis. If the custodian hasn't updated the cost basis record yet, selling could produce a phantom gain on your 1099-B. Confirm the basis first.
• Assuming retirement accounts get stepped up. A $1M traditional IRA and a $1M brokerage account are not equivalent inheritances. The IRA triggers ordinary income tax on every withdrawal; the brokerage account does not.
• Gifting low-basis stock instead of holding it. The single most common expensive mistake in estate planning for affluent families. Gift high-basis or cash; keep the low-basis appreciated assets until death.
• Ignoring state income tax. Several states (CA, NY, NJ, OR, MA, MN) have their own capital gains taxes. The federal step-up applies for federal purposes; state income tax treatment is usually similar but check your specific state. State estate taxes are separate.
• Missing the alternate valuation date election. If the estate is large enough to file Form 706 (over $15M) and the assets declined in value in the 6 months after death, the executor can elect the alternate valuation date to step up to the lower 6-month value. For most $1M–$5M estates this is irrelevant, but be aware it exists.

Step-Up vs. Carryover Basis at a Glance

1. IRC §1014 — Basis of Property Acquired from a Decedent (Cornell LII)
2. IRS Publication 550: Investment Income and Expenses — Basis of Inherited Property
3. IRS: Charitable Contribution Deductions — Appreciated Property
4. IRS Newsroom: One Big Beautiful Bill Act — Estate/Gift Exemption $15M (OBBBA P.L. 119-21)
5. IRC §1223(11) — Holding Period for Inherited Property (Cornell LII)

Values verified August 2026. 2026 LTCG brackets: 0% at $49,450/$98,900 MFJ, 20% above $545,500/$613,700 MFJ (IRS Rev. Proc. 2025-67). NIIT 3.8% above $200K/$250K MFJ (IRC §1411). Estate exemption $15M (OBBBA P.L. 119-21).