What is step-up in basis?

Without a step-up, an heir would inherit the original owner's cost basis, known as carryover basis, and owe capital-gains tax on the full appreciation when the asset is eventually sold. With a step-up, that built-in gain is effectively erased for tax purposes at death (see IRS Publication 551, Basis of Assets).

For example, if someone bought stock for $50,000 and it was worth $500,000 at their death, the heir's basis becomes $500,000. If the heir sells at $500,000, no capital-gains tax is owed on the $450,000 of appreciation that built up during the original owner's lifetime.

California note: California is a community property state. Under Internal Revenue Code Section 1014(b)(6), when one spouse dies, both halves of the couple's community property (the deceased spouse's half and the surviving spouse's half) typically receive a full step-up in basis to fair market value. This double step-up can be meaningfully more favorable than the single step-up available in common-law states, where only the deceased spouse's portion is stepped up.

The step-up is a central consideration when deciding whether to hold an appreciated asset for heirs or sell it during your lifetime, particularly for concentrated stock positions or long-held real estate. It may also factor into decisions about Roth conversions, since paying tax now on a conversion could be less attractive than passing certain appreciated assets on with a step-up instead.

Because these tradeoffs interact with estate planning, income needs, and overall tax strategy, they are usually evaluated together rather than in isolation.