Step-Up in Basis

A collection of strategies to help business owners keep more of their wealth.

Key numbers

If you do nothing else in the Legacy section, understand this one.

When someone inherits an investment — stocks, real estate, a business — their cost basis for tax purposes is the value of that asset on the date of death, not the original purchase price. This is called the step-up in basis. The gain that accumulated over years or decades is never taxed.

The numbers on this are striking. Consider buying $500,000 of index funds twenty years ago. They're worth $3M today. If you sell, you owe capital gains tax on $2.5M in gains — roughly $925,000 at a combined rate of 37%. If you hold until death and leave the investment to your heirs, the basis steps up to $3M. Your heirs sell the next day and owe $0 in capital gains tax. The $925,000 tax bill simply disappears.

This changes how you think about taxable investment accounts. The instinct when you need liquidity is to sell appreciated assets. But if the assets are long-term holdings you don't urgently need to sell, holding them until death is often the highest-value move you can make — both for your estate and for your heirs.

Combine this with the estate tax exemption and the picture gets even better. If your total estate is below $15M per person — $30M for a married couple — there's no federal estate tax either. Assets below that threshold pass to heirs completely tax-free, with a full step-up in basis. No capital gains tax. No estate tax. Zero.

A few things to keep in mind

• The step-up applies to assets you own at death. Assets you've already gifted (above the annual exclusion) carry over the original basis — your heirs inherit your gain, not a fresh start. For highly appreciated assets you intend to leave to heirs, holding is usually better than gifting.
• Retirement accounts (traditional IRAs, 401(k)s) do not get a step-up in basis. They're still taxed as ordinary income when heirs withdraw. The step-up applies to assets in taxable accounts, real estate, and non-retirement investment accounts.
• In community property states like California, a surviving spouse gets a step-up on both halves of community property — not just the decedent's half. This is a meaningful advantage over non-community property states.

The step-up in basis costs you nothing. No planning required. The strategy is simply to hold appreciated assets in taxable accounts rather than selling them, let them compound, and let your heirs inherit them with a clean slate.