Inherited Property Tax Basis: How the Stepped-Up Basis Works

The stepped-up basis applies to most types of property that a person owns at death, but there are some worth mentioning exceptions and special rules that catch beneficiaries off guard. Understanding which assets get the step-up and which don’t can make a difference of tens of thousands of dollars in taxes when you eventually sell inherited property.

Assets that do receive a stepped-up basis under IRC Section 1014 include: real estate (primary residences, rental properties, vacation homes, commercial buildings, raw land), stocks and bonds held in taxable brokerage accounts, mutual funds and ETFs in taxable accounts, business interests (partnerships, LLCs, sole proprietorships), tangible personal property (art, jewelry, collectibles, vehicles), and intellectual property. Basically, if it’s a capital asset with an ascertainable fair market value at the date of death, it generally qualifies for the stepped-up basis.

The biggest category of assets that do not receive a stepped-up basis is retirement accounts — traditional IRAs, 401(k)s, 403(b)s and annuities. These accounts contain “income in respect of a decedent” (IRD), which means the money has never been taxed and the tax liability transfers to the beneficiary. When you inherit a traditional IRA, every dollar you withdraw is taxed as ordinary income at your personal tax rate, regardless of what the account was worth when the original owner died. There’s no step-up. This is why financial planners sometimes recommend Roth conversions before death — converting traditional IRA money to Roth during the owner’s lifetime means beneficiaries inherit the Roth tax-free, which is effectively better than a stepped-up basis.

Roth IRAs are a special case. While Roth IRAs technically don’t receive a “stepped-up basis” in the traditional sense, beneficiaries can withdraw inherited Roth IRA money completely tax-free (assuming the account met the 5-year rule). So the practical effect is even better than a step-up — there’s no tax at all on the inherited Roth, whereas a stepped-up basis on a stock only eliminates the gain from original purchase to date of death (you’d still owe tax on any appreciation after the date of death).

Cash and cash equivalents (checking accounts, savings accounts, CDs, money market funds) technically receive a stepped-up basis, but since cash doesn’t appreciate or depreciate, the step-up is meaningless. The basis of cash is its face value — always. So inheriting $50,000 in a savings account doesn’t involve any basis considerations. You just get the cash.

Life insurance proceeds are another asset class that doesn’t involve a stepped-up basis, but for a different reason: life insurance death benefits are generally income-tax-free under IRC Section 101(a). The beneficiary receives the full death benefit without owing any income tax, regardless of how much the deceased paid in premiums. There’s no need for a step-up because there’s no taxable event. (However, the full value of the life insurance policy may be included in the deceased’s estate for estate tax purposes if the deceased owned the policy at death.)

For real estate, the stepped-up basis is often the most financially significant benefit. Suppose your mother bought a house in 1985 for $120,000 and it’s worth $750,000 at her death. Your stepped-up basis is $750,000. If you sell the house for $760,000, your taxable gain is only $10,000 — not $640,000. At the 15% long-term capital gains rate, you owe $1,500 instead of $96,000. The stepped-up basis just saved you $94,500 in capital gains tax. This is exactly why many families hold appreciated real estate until death rather than gifting it during life (gifts carry over the donor’s original basis, as we’ll discuss in more detail below).

Stocks and mutual funds in taxable brokerage accounts also get the full step-up. If your father bought 1,000 shares of Apple at $10 per share ($10,000 total) and those shares are worth $200,000 at his death, your basis is $200,000. All $190,000 in gains accumulated during his lifetime are permanently erased from a tax perspective. This is one of the most powerful wealth-transfer mechanisms in the tax code, and it’s why wealthy families often hold highly appreciated stock positions for decades rather than selling.

For partnership and LLC interests, the stepped-up basis works but with additional complexity. The heir’s outside basis (their basis in the partnership interest itself) is stepped up to fair market value at death. But the inside basis (the partnership’s basis in its underlying assets) doesn’t automatically adjust unless the partnership has a Section 754 election in effect. Without a 754 election, there can be a mismatch between the heir’s stepped-up outside basis and the partnership’s inside basis, which can lead to phantom income or missed depreciation deductions. If you inherit a partnership or LLC interest, check whether a 754 election is in place — and if it’s not, consider whether filing one makes sense.

Community property gets a special, extra-favorable rule. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Wisconsin), both halves of community property receive a stepped-up basis when one spouse dies — not just the deceased spouse’s half. This means the surviving spouse’s half also gets a fresh basis, even though the surviving spouse is still alive. In a separate property state, only the deceased spouse’s half receives the step-up, and the surviving spouse retains their original basis on their half. This community property step-up can save surviving spouses substantial capital gains taxes, which is one reason some financial planners recommend converting separate property to community property before a spouse’s death (where state law allows it).

One asset class where the stepped-up basis gets complicated is depreciated business property. If the deceased claimed depreciation on a rental property or business equipment, the stepped-up basis effectively “resets” the depreciation clock. The heir’s new basis is the fair market value at death, and they can start depreciating the property all over again using that new, higher basis. This is a significant planning benefit for inherited rental properties — the heir gets fresh depreciation deductions even though the original owner may have fully depreciated the property.

There’s been periodic political discussion about eliminating or modifying the stepped-up basis, and several proposals have been floated over the years. The Biden administration proposed eliminating the step-up for gains above $1 million in 2021, but the proposal didn’t become law. Under current law (as reinforced by OBBBA), the stepped-up basis remains fully intact with no dollar limit. That said, estate planning strategies that rely on the step-up should be reviewed periodically, because the rules could change in future legislation.

If you’ve inherited property and aren’t sure whether the stepped-up basis applies or how to calculate it, contact our team. Getting the basis right at the time of inheritance is critical — a mistake here can cost you thousands in unnecessary capital gains tax when you eventually sell.

If the property is worth less at the date of death than what the original owner paid for it, the basis is stepped down to the lower fair market value — not up. This is one of the less-discussed aspects of IRC Section 1014, and it can produce results that feel unfair, especially when the heir knows the original purchase price was much higher.

Here’s how it works. Section 1014 says the basis of property acquired from a decedent is the “fair market value at the date of the decedent’s death.” Notice it says fair market value — not “original cost” or “higher of cost and value.” The basis adjusts to whatever the property is worth at death, whether that’s higher or lower than what the deceased originally paid. So the step-up works in both directions, though “stepped-down basis” is the informal term used when the value has declined.

Let’s put a specific example on this. Your uncle bought a vacation condo in 2007 for $400,000 — right before the real estate crash. By the time he passes away in 2025, the condo is worth $280,000. When you inherit the property, your basis is $280,000 (the fair market value at death), not $400,000 (what your uncle paid). If you sell the condo for $300,000, your taxable gain is $20,000. You can’t claim a loss based on your uncle’s original $400,000 purchase price — that original cost basis died with him.

The $120,000 loss ($400,000 original cost minus $280,000 value at death) simply evaporates. Nobody ever gets to deduct it. Your uncle never sold the property during his lifetime, so he never realized the loss. And the stepped-down basis means you inherited the property at its current (lower) value, so you have no built-in loss to realize either. This is the worst-case scenario from a tax perspective — the loss is permanently wasted.

This creates an important planning opportunity that families should know about before it’s too late: if someone owns property that has declined in value and they’re in the final stages of life, it may be better to sell the property before death rather than leaving it to heirs. When the owner sells the property, they can realize the loss on their final tax return. Capital losses can offset capital gains, and up to $3,000 in excess losses can be deducted against ordinary income. If the losses are large enough, they can be carried forward by the estate or on the final return to reduce other taxes owed.

For example, if your uncle sold the condo for $280,000 before his death, he’d realize a $120,000 capital loss. That loss could offset any capital gains he had during the year. The remaining loss (up to $3,000 per year) could be deducted against ordinary income on his final return and the estate’s returns. The cash from the sale — $280,000 — would then pass to the heirs through the estate or trust, with no basis complications at all. Compare that to inheriting the condo with a $280,000 stepped-down basis: the $120,000 loss is gone forever.

The timing question matters a lot here. The “date of death” valuation is the default, but the estate’s executor can elect to use an “alternate valuation date” — exactly six months after the date of death — under IRC Section 2032. This election is only available if it both reduces the gross estate value and reduces the estate tax liability. It can’t be used solely to manipulate the heir’s basis. If the property has continued declining in value during the six months after death, the alternate valuation date would give the heir an even lower basis — which is usually undesirable. Conversely, if the property’s value recovered during those six months, the alternate valuation date could provide a higher basis. The executor should evaluate both dates carefully.

For stocks and mutual funds, the stepped-down basis issue comes up frequently during market downturns. If someone passes away while holding stocks that have declined significantly — say, they bought tech stocks at the peak of a bubble and died during the crash — the heirs’ basis is the depressed value at death. If the stocks later recover, the heirs will owe capital gains tax on the entire recovery, even though from the family’s perspective, they’re just getting back to even.

Here’s a concrete stock example: your grandmother bought 500 shares of a tech company at $200 per share ($100,000 total) in early 2022. The stock dropped to $80 per share by the time she passed away in 2025, so the total value was $40,000. Your stepped-down basis is $40,000. If the stock recovers to $200 per share and you sell for $100,000, your taxable gain is $60,000. At the 15% long-term capital gains rate, you owe $9,000 — even though the family as a whole didn’t make a dime. Had your grandmother sold before death and realized the $60,000 loss, that loss could have saved the family $9,000+ in taxes (offsetting other gains) while the cash passed to you basis-free through the estate.

For diversified portfolios, the issue is more detailed. A brokerage account might contain some positions with gains and others with losses. The stepped-up (or stepped-down) basis applies on a per-asset basis — each individual stock, bond, or fund lot gets its own basis adjustment. So the heir might have stepped-up basis on some holdings and stepped-down basis on others. Smart tax planning before death might involve selling the losers (to realize the losses on the final return) while holding the winners (to get the stepped-up basis at death). This “harvest the losses, hold the gains” approach makes the most of the family’s overall tax benefit.

One more planning angle: if you know you’re going to inherit property that has declined in value, consider whether the current owner can gift the property to you before death instead of leaving it to you through the estate. When you receive a gift of property with a built-in loss, the basis rules are different from inheritance. For purposes of calculating a loss, your basis is the lower of the donor’s basis or the fair market value at the time of the gift. This might not help (you still can’t claim the donor’s unrealized loss), but in some situations — particularly when the property is expected to appreciate after the gift — the gift basis rules could be more favorable than the stepped-down basis you’d receive at death. These situations are fact-specific and require careful analysis.

The bottom line on stepped-down basis: it’s a trap that eliminates unrealized losses permanently. If someone you know owns property that has declined in value and their health is declining, talk to a tax professional immediately about whether selling the asset before death can preserve the loss. Once the person dies, the opportunity to claim that loss is gone forever. Our team can help evaluate the situation and recommend the most tax-efficient approach.

Yes, you can — but how much of a step-up you get depends on whether you live in a community property state or a separate property (common law) state. This distinction can mean the difference between a partial step-up and a full step-up on the entire property, and it’s one of the most valuable (and least understood) aspects of spousal inheritance tax planning.

In separate property states — which include the majority of U.S. states, including New York, Florida, Illinois, Pennsylvania and most others — only the deceased spouse’s share of the property receives a stepped-up basis. If both spouses jointly owned a property as joint tenants or tenants by the entirety (the most common forms of joint ownership for married couples), the deceased spouse is treated as owning 50% of the property. That 50% gets stepped up to fair market value at the date of death. The surviving spouse’s 50% retains its original cost basis.

Here’s a concrete example in a separate property state. You and your spouse bought a home together in 1995 for $200,000 — each of you is deemed to have a $100,000 basis in your half. The home is worth $800,000 when your spouse passes away. Your spouse’s half gets stepped up to $400,000 (50% of the $800,000 fair market value). Your half stays at your original $100,000 basis. Your total basis in the property is now $500,000 ($400,000 + $100,000). If you sell the home for $800,000, your gain is $300,000. After applying the $250,000 home sale exclusion (the $500,000 exclusion for married couples doesn’t apply since you’re now filing single), you’d owe capital gains tax on $50,000 — about $7,500 at the 15% rate.

Now let’s look at the same scenario in a community property state — California, Texas, Arizona, Nevada, New Mexico, Idaho, Louisiana, Washington, or Wisconsin. In community property states, both halves of community property receive a stepped-up basis when one spouse dies, under IRC Section 1014(b)(6). This is the “double step-up” that estate planners talk about, and it’s extraordinarily valuable.

Same facts: home bought in 1995 for $200,000, worth $800,000 at the first spouse’s death. In a community property state, the entire property is community property (assuming it was purchased during the marriage with community funds). Both halves get stepped up — not just the deceased spouse’s half. The surviving spouse’s basis in the entire property is $800,000 (the full fair market value at death). If the surviving spouse sells the home for $800,000, the gain is zero. Zero capital gains tax. Compare that to the $7,500 tax bill in the separate property state example.

The difference becomes even more dramatic with highly appreciated property. A couple in California who bought a home in 1980 for $100,000 that’s worth $2,000,000 at the first spouse’s death gets a full stepped-up basis of $2,000,000 on the entire property. In a separate property state, the surviving spouse’s basis would be $1,050,000 ($50,000 original basis on their half plus $1,000,000 step-up on the deceased’s half), leaving a potential $950,000 gain if they sell. At 15%, that’s $142,500 in federal capital gains tax (before applying the $250,000 exclusion), compared to zero in a community property state. The community property double step-up just saved the surviving spouse over $100,000 in taxes.

This community property advantage applies to all types of community property, not just real estate. Stocks, bonds, mutual funds, business interests, and other assets held as community property all qualify for the full double step-up. Some couples in separate property states have even explored converting assets to community property through community property trusts (available in a few states like Alaska, Tennessee, South Dakota, and Kentucky) specifically to capture this double step-up benefit.

For separate property states, there’s a planning strategy that can increase the step-up: if the property is held solely in the deceased spouse’s name (rather than jointly), then 100% of the property gets the stepped-up basis because 100% of it is part of the deceased’s estate. The tradeoff is that sole ownership creates estate planning complications and potential probate issues, so this approach requires coordination with an estate planning attorney. It may also have gift tax implications if one spouse transferred their interest to the other before death.

The marital deduction (IRC Section 2056) ensures that property passing from one spouse to another is exempt from estate tax, regardless of value. So the stepped-up basis is available without any estate tax cost for spousal transfers. When the surviving spouse eventually dies, the remaining property gets another step-up to fair market value at the surviving spouse’s date of death — giving the next generation of heirs a fresh basis. This “double step-up over two deaths” is one of the most powerful tax-free wealth transfer mechanisms in the code.

One complication: if the deceased spouse’s property passes to the surviving spouse through a trust rather than outright, the type of trust matters. Property in a revocable living trust (the most common estate planning trust) qualifies for the stepped-up basis just like property owned outright. Property in an irrevocable trust generally does not qualify for a step-up at the surviving spouse’s death, because the surviving spouse doesn’t “own” the trust property. The SECURE Act and subsequent legislation have added complexity to trust-owned retirement accounts, but for non-retirement assets, the revocable vs. irrevocable distinction remains the key factor.

If you’ve recently lost a spouse and own appreciated property — or if you’re doing estate planning and want to make the most of the stepped-up basis benefit — contact our team. We can help you determine whether your property qualifies for a partial or full step-up and identify strategies to minimize capital gains tax on any future sale.

An important planning note for married couples: if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), both halves of community property get a stepped-up basis when one spouse dies — not just the decedent’s half. This is a significant advantage over separate property or common law states, where only the decedent’s half receives the step-up. A couple in California with $2 million in jointly held community property stocks (original basis $400,000) gets a full step-up to $2 million when one spouse dies, even though the surviving spouse already owned half. In a common law state like New York, only the decedent’s $1 million half gets the step-up, leaving the surviving spouse with $200,000 basis on their half.

You don’t always need a formal appraisal, but you do need a defensible fair market value as of the date of death, and in many cases, getting a professional appraisal is the smartest move you can make. The IRS can challenge your claimed basis years or decades after you inherit the property — when you eventually sell it — so having solid documentation now can save you enormous headaches (and money) later.

Let’s break down when an appraisal is required versus when it’s just recommended. For estate tax purposes, if the estate is large enough to file an estate tax return (Form 706), qualified appraisals are required for real estate, closely held business interests, art and other assets that don’t have readily determinable market values. The estate tax return filing threshold is $15 million for deaths in 2026 (or $30 million for married couples using portability). Even if the estate is below the filing threshold and no Form 706 is filed, the fair market value at death still determines the heir’s stepped-up basis for income tax purposes — and you need evidence to support whatever value you use.

For publicly traded stocks and mutual funds, establishing fair market value is straightforward: the value is the closing price on the date of death (or the average of the high and low trading prices, depending on the methodology used). Your brokerage should provide a date-of-death valuation statement if you request one. No appraisal needed. The heir should update the cost basis with the brokerage account to reflect the stepped-up value — many brokerages do this automatically when assets are transferred from a deceased person’s account to an heir’s account, but double-check to make sure the basis is correct. An incorrect basis at the brokerage level can lead to incorrect 1099-B reporting when you eventually sell, which creates tax return problems.

For real estate, a formal appraisal is almost always advisable. Real estate doesn’t have a daily market price like stocks do, so establishing the fair market value at a specific date requires professional judgment. A qualified real estate appraiser will inspect the property, compare it to recent sales of similar properties in the area (comparable sales or “comps”), and produce a written appraisal report that documents the property’s value as of the date of death.

The cost of a real estate appraisal typically ranges from $300 to $600 for a standard residential property, and $1,000 to $5,000 for commercial properties or unusual estates. That’s a trivial cost compared to the potential tax impact. If you inherit a home worth $600,000 and the IRS later challenges your basis because you don’t have an appraisal, they could argue for a lower value (say $500,000), which would increase your taxable gain by $100,000 when you sell — costing you $15,000+ in capital gains tax. A $400 appraisal prevents that risk entirely.

Timing matters for the appraisal. Ideally, you should get the appraisal done as close to the date of death as possible, while the property condition and market comparables are still relevant. If you wait two years to get an appraisal, the appraiser will have a harder time finding comparable sales from the date-of-death period, and the appraisal may be less reliable (and more likely to be challenged by the IRS). Most tax professionals recommend getting the appraisal within 3 to 6 months of the date of death.

For rental properties and investment real estate, a thorough appraisal is especially important because it establishes not just the total property value but also the allocation between land (not depreciable) and improvements (depreciable). The heir gets to start a fresh depreciation schedule based on the stepped-up basis, and the land/improvement split determines how much can be depreciated from now on. A higher allocation to improvements means larger annual depreciation deductions. Some appraisers will provide a land/improvement allocation as part of the appraisal, or you may need a separate cost segregation study for commercial properties.

For business interests — partnerships, LLCs, S-corps, closely held C-corps — a qualified business valuation is necessary. This is different from a real estate appraisal and typically requires a credentialed business appraiser (such as an ASA, ABV, or CVA designation). Business valuations can cost $5,000 to $50,000+ depending on the complexity of the entity and its assets. While this seems expensive, the stepped-up basis on a business interest worth $2 million could save the heir $300,000 in capital gains tax — making the valuation cost irrelevant by comparison.

For personal property — art, antiques, jewelry, collectibles, vehicles — appraisals are recommended for items worth more than a few thousand dollars. The IRS Art Advisory Panel reviews claimed values for art donations and estates, and they adjust claimed values roughly 40-50% of the time. If you’re inheriting a painting worth $50,000, get an appraisal from a qualified art appraiser. For everyday personal property (furniture, household goods, clothing), most estates use a reasonable fair market value estimate — what a willing buyer would pay at a garage sale or secondhand market. Formal appraisals for these items are rarely necessary unless individual items have significant value.

What happens if you don’t have any documentation of fair market value? You’re not necessarily out of luck, but you’re in a weaker position if the IRS asks questions. You can use county tax assessor records (though these often lag behind actual market values), Zillow or Redfin estimates (these are not appraisals and the IRS doesn’t treat them as authoritative, but they’re better than nothing), recent comparable sales data, or retroactive appraisals (some appraisers can provide a “retrospective” appraisal that estimates value as of a past date). None of these are as strong as a contemporaneous professional appraisal, so get the appraisal at the time of inheritance if at all possible.

The statute of limitations is also worth knowing. The IRS generally has three years from the date you file a return to challenge the basis you used. But if you understate your income by more than 25%, the statute extends to six years. And if you fail to file entirely or commit fraud, there’s no statute of limitations at all. This means the IRS could theoretically challenge your inherited basis 10 or 20 years from now if you sell the asset and the numbers look off. Having that appraisal report sitting in your files is your insurance policy.

For help establishing the stepped-up basis on inherited property — including finding qualified appraisers and correctly setting up your tax records for the future — schedule a consultation with our team.

From a tax perspective, inheriting property is almost always better than receiving it as a gift during the owner’s lifetime. The difference comes down to one thing: basis. Inherited property gets a stepped-up basis to fair market value at the date of death, which can eliminate years or decades of built-in capital gains. Gifted property carries over the donor’s original cost basis, preserving the entire built-in gain for the recipient to deal with when they eventually sell.

Let me show you exactly how big the difference can be. Your mother bought a rental property in 1990 for $150,000. It’s now worth $650,000. She’s considering either gifting it to you now or letting you inherit it when she passes away.

If she gifts it to you today: under IRC Section 1015, your basis in the property is her carryover basis — $150,000 (adjusted for any improvements she made and depreciation she claimed). When you sell the property for $650,000, your taxable gain is $500,000. At the 15% long-term capital gains rate, you owe $75,000 in federal capital gains tax. Add the 3.8% net investment income tax (NIIT) if your income exceeds $200,000, and you’re looking at $94,000 in total federal taxes on the sale. If she’s already claimed $80,000 in depreciation, your gain is actually higher — $580,000 — because depreciation reduces the basis further. The depreciation recapture portion ($80,000) is taxed at 25%, costing an additional $20,000.

If you inherit it at her death: your basis steps up to $650,000 (the fair market value at the date of death). All the gain that accumulated during her 35 years of ownership — $500,000 — is wiped out. The depreciation she claimed is also wiped out through the step-up. If you sell the property immediately for $650,000, your gain is zero and your tax is zero. The step-up just saved you $75,000 to $114,000 in federal taxes (depending on depreciation recapture). This is not a small number — for many families, it’s the difference between keeping a property and being forced to sell a portion to pay the tax bill.

The gift tax implications add another wrinkle. When someone makes a gift of property, the donor (not the recipient) is responsible for filing a gift tax return (Form 709) if the gift exceeds the annual exclusion — $19,000 per recipient for 2026. A $650,000 property gift would use $631,000 of the donor’s lifetime gift/estate tax exemption ($15 million for 2026). No gift tax is actually owed unless the donor has already used up their entire lifetime exemption, but the exemption used for gifts reduces what’s available for the estate tax exclusion at death. So a large gift saddles you with a carryover basis and reduces the donor’s estate tax planning flexibility.

There’s one scenario where a gift can be better than an inheritance: when the property has decreased in value below the owner’s basis. As discussed earlier, the stepped-up basis works both ways — if the property has declined in value, the basis steps down to the lower fair market value at death, and the unrealized loss is permanently lost. In that situation, it might be better for the owner to either sell the property before death (to realize the loss) or gift it to the intended recipient (though the gift basis rules for loss property are tricky — the recipient’s basis for calculating a loss is the fair market value at the time of the gift, not the donor’s original cost).

Another scenario where gifts can make sense: if the donor owns property with little or no appreciation. A parent gifting $50,000 in cash to a child has no basis issue — cash is cash, and there’s no gain or loss to worry about. Similarly, gifting property that was recently purchased (so the basis and fair market value are close) eliminates the basis disadvantage. The gift/inheritance calculus is really about the spread between the current basis and the current fair market value. The bigger the spread (the more built-in gain), the more valuable the step-up at death becomes.

For family businesses, the gift-vs-inheritance question is more complex because it intersects with valuation discounts, trust planning, and income tax considerations. Gifting minority interests in a family LLC or partnership during life can take advantage of valuation discounts (lack of marketability and minority interest discounts) that reduce the gift tax value, effectively transferring more wealth using less of the lifetime exemption. But the carryover basis issue still applies — the recipient of the gifted interest takes the donor’s basis, which could produce a larger gain when the business is eventually sold. Each situation requires modeling both scenarios to see which approach produces the better after-tax result.

Here’s an estate planning concept that combines the best of both worlds: the “estate freeze.” The owner transfers future appreciation in an asset to the next generation through a technique like a Grantor Retained Annuity Trust (GRAT) or an installment sale to an Intentionally Defective Grantor Trust (IDGT), while retaining enough interest to get a stepped-up basis on the retained portion at death. The future appreciation grows outside the estate and transfers to the heirs without estate tax. The portion retained by the owner gets the stepped-up basis at death. These are advanced strategies that require working with an estate planning attorney and tax advisor, but for families with significant appreciated assets, they can save millions in combined estate and income taxes.

The bottom line for most families: hold appreciated property until death to capture the stepped-up basis. Don’t gift property with large built-in gains unless there’s a specific, modeled reason to do so. And if you’re the recipient of either a gift or an inheritance, make sure you know your basis — getting it wrong can cost you thousands when you eventually sell. Our team at reedcorp.tax can help you plan the most tax-efficient approach for transferring property between generations.

The takeaway: inheriting is almost always better from a pure tax perspective. The stepped-up basis at death eliminates all unrealized gains accumulated during the decedent’s lifetime, while a gift preserves the original cost basis and all of its embedded tax liability transfers to you.

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