Step-up in basis is a US rule that resets an inherited asset’s cost basis to its market value on the owner’s date of death, erasing the capital gains tax on everything the asset gained during the owner’s lifetime.
In plain terms
Cost basis is what you paid. Capital gains tax is charged on the difference between what you paid and what you sold for. When an asset passes at death, that difference is wiped clean: the heir is treated as if they had bought the asset on the day the owner died. Fifty years of appreciation on a stock, a building, or a private company simply stops existing for income tax purposes.
How it works
Suppose someone buys stock for $1 million and dies when it is worth $20 million. Sold the day before death, the gain is $19 million and the federal capital gains bill is roughly $4.5 million. Passed at death, the heir’s basis becomes $20 million. They can sell the next morning for $20 million and owe nothing.
The step-up applies to assets included in the taxable estate — which is the trade-off at the center of most estate planning. Assets moved out of the estate during life to avoid the estate tax generally carry over the original basis instead of getting stepped up. Below the exemption, keeping an appreciated asset in the estate is usually the better answer; above it, the calculation reverses.
Not everything steps up. Retirement accounts, annuities, and other income in respect of a decedent do not. In community property states, both halves of community property step up when the first spouse dies, rather than only the deceased spouse’s half.
The numbers
- Top federal long-term capital gains rate (2026): 23.8%, including the 3.8% net investment income tax. State tax comes on top.
- Federal estate and gift tax exemption (2026): $15 million per person, $30 million per married couple, indexed for inflation after 2026.
- Top federal estate tax rate above the exemption: 40%.
- Practical consequence: an estate below $15 million per person generally pays no estate tax and gets the step-up — the appreciation is never taxed by anyone, at any point.
What people get wrong
That it is a loophole for the very rich specifically. The step-up applies to every estate, and in dollar terms most of it goes to ordinary inherited houses and brokerage accounts. What makes it consequential at the top is that it converts an unrealized gain into a permanently untaxed one — and that is only valuable if you never had to sell. A household that needs the money spends its lifetime realizing gains and paying tax on them. A household wealthy enough to borrow against assets instead of selling them can hold until death and skip the tax entirely. The rule is universal; the ability to exploit it fully is not.
Related
Read more: Inheritance: The Transfer of Wealth Between Generations · Taxes: How Wealth Is Structured and Preserved · Borrowing Against Wealth
See also: Buy, borrow, die · Estate tax exemption · Dynasty trust