Legacy · 5 min read · Updated November 10, 2026

Step-up in basis: why timing matters

Illustrative examples, education not advice.

In plain words

When you sell an investment, you pay capital gains tax on the difference between what you sold it for and your cost basis, which is roughly what you paid.

If you hold an asset until death, your heirs usually receive it with a new basis equal to its fair market value on the date of death. This is the step-up in basis, under Section 1014 of the tax code. If they sell soon after, there may be little or no taxable gain. Decades of growth can pass without capital gains tax.

If you give the same asset away while alive, the recipient generally takes over your original basis. This is called carryover basis. When they sell, they pay tax on the full gain.

That one difference shapes many estate planning choices.

How it helps real people

Saves heirs real money. Long-held stocks, a family home or rental property can carry large gains.
Simplifies selling. Heirs can sell inherited assets to divide an estate without a big tax bill.
Guides what to gift and what to keep. Give cash or high-basis assets now; keep low-basis assets until death, when it fits your plan.
Helps with property. For rental real estate, the new basis can also restart depreciation for the heir.

A worked example

Illustrative. Ruth, 81, is fictional. She bought shares in a company decades ago for $40,000. Today they are worth $640,000. She wants her son Eli to have them.

	Ruth gifts the shares now	Eli inherits at Ruth’s death
Eli’s cost basis	$40,000 (Ruth’s)	About $640,000 (value at death)
Gain if Eli sells for $640,000	$600,000	About $0
Illustrative federal capital gains tax at 15%	About $90,000	About $0
Possible 3.8% net investment income tax	May apply	Not on that gain

If Ruth needs money from the shares for her care, selling them herself is still an option; the step-up only matters for what is still held at death. For her, keeping the shares and gifting cash instead may make more sense.

These figures are illustrative only and not tax advice. Actual rates depend on income and filing status.

What usually does not get a step-up

Traditional IRAs, 401(k)s and annuities. Money in these accounts has never been taxed. Heirs pay ordinary income tax on withdrawals. There is no step-up.
Gifts made during life. Generally carryover basis.
Assets that have lost value. The basis steps down to the lower value at death, so the loss is lost too.
Certain gifts back to the giver. If you give an appreciated asset to someone who dies within one year and it comes back to you, there is generally no step-up.

Married couples

In common-law states, generally only the half of jointly owned property that belonged to the deceased spouse gets a step-up.
In community property states, both halves of community property can often get a step-up at the first death. Title and records matter.

Who it’s for

Families holding long-held stocks, real estate or a business with large unrealized gains.
Older adults deciding what to sell, what to gift and what to keep.
Heirs settling an estate, who need to document values at death.

Who it’s not for

If most of your wealth is in traditional retirement accounts, the step-up does not apply to them.
If you need the money, do not hold an asset just for the step-up. Your own security matters more than your heirs’ tax.

Risks and trade-offs

Holding for the step-up can mean holding too much of one stock. Concentration risk can cost more than the tax saved.
Laws can change. The step-up has been debated in Congress before.
Valuation must be documented. Real estate, businesses and collectibles may need a professional appraisal as of the date of death.
Estate tax still applies above the exemption. The step-up is about income tax, not estate tax.

Common mistakes

Gifting low-basis stock to children who then sell it and pay tax that could have been avoided.
Not getting a date-of-death appraisal for real estate or a business.
Assuming retirement accounts get a step-up. They do not.
Forgetting the basis records. Heirs need them to report sales correctly.
Selling right before death when a step-up was close at hand, if there was no need for the cash.

FAQs

Does life insurance get a step-up?

Life insurance death benefits are generally received income-tax-free by beneficiaries, so step-up is not usually the issue. A policy transferred for value can lose that treatment, so get advice before selling or transferring one.

Does a living trust keep the step-up?

Yes, generally. Assets in a revocable living trust are treated as yours, so they usually get a step-up at death.

What about assets in an irrevocable trust?

It depends. Many irrevocable trusts are designed to keep assets out of your estate, which usually means no step-up. Some are drafted to allow it. Ask a licensed professional.

Do heirs have to sell right away?

No. The basis is set at the date of death (or an alternate valuation date in some estates). Gains after that are taxable when sold.

How do heirs prove the new basis?

With brokerage statements, appraisals and, for estates that file one, the estate tax return. Keep these records.

Your next step

Ask VeraLife (/#ask) which of your assets carry the biggest built-in gains and how that might affect what you give now versus later.

Education, not advice. Examples are illustrative. VeraLife.ai is not a registered investment adviser, broker-dealer or insurance agency.