Definition
The rule that resets the cost basis of an inherited asset to its fair market value on the date the owner died. The capital gain that built up during the owner's lifetime is never taxed; the heir owes tax only on growth after the death. It applies to inherited assets, not to gifts made during life, which carry the giver's original basis, and not to retirement accounts, whose withdrawals are taxed as ordinary income regardless.
Why it matters
The step-up is why holding an appreciated asset until death can beat selling or gifting it, and why heirs should get a date-of-death valuation for everything they inherit. For married couples, whether a jointly held asset gets a half or a full step-up at the first death depends on the state's property rules.
Example
A father bought a house for $100,000; it is worth $600,000 when he dies. His daughter inherits it with a $600,000 basis and sells it a year later for $610,000, owing capital gains tax on $10,000, about $1,500 at an assumed 15% rate. Had he signed the house over to her while alive, she would have taken his $100,000 basis and owed tax on a $510,000 gain, roughly $76,500.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.