An adjustment to the cost basis of property transferred at death, where the basis is "stepped up" from the original purchase price to the fair market value at the date of death. This adjustment eliminates capital gains tax on appreciation that occurred during the decedent's lifetime. Primarily relevant in jurisdictions with capital gains taxes on inheritance.
Stepped-up basis means when you inherit property, its value for tax purposes is reset to what it was worth when the person died, not what they originally paid for it. If your dad bought shares for $10,000 that are worth $100,000 when he dies, your basis is $100,000—so you don't pay capital gains tax on that $90,000 growth.
⏱ When you'll encounter this term
- Inheriting appreciated property like stocks or real estate
- Planning to sell inherited assets
- Tax planning for estate transfers
- Calculating capital gains tax on inherited property
"Mum bought her house for $150,000 in 1990. When she died in 2024, it was worth $800,000. I inherited it with a stepped-up basis of $800,000. When I sold it a year later for $820,000, I only paid capital gains tax on the $20,000 increase, not the $670,000 gain during Mum's ownership."
⚖️ Compare: Stepped-Up Basis vs Original Basis
Inherited property. Basis reset to date-of-death value. No tax on previous appreciation. Significant tax advantage.
Gifted property during life. Keeps donor's original basis. Recipient pays tax on all appreciation including during donor's ownership.
💡 Did you know?
The stepped-up basis rule is why tax advisors often recommend holding highly appreciated assets until death rather than gifting them during life—the inheritance gets a stepped-up basis, while lifetime gifts carry over the original low basis, creating larger capital gains for the recipient.