What Happens to Your Step-Up in Basis — The Tax Break Families Miss Account When You Die
Quick Facts
Applies to
Most inherited assets
Exception
IRAs / 401(k)s
Action needed
Document FMV immediately
Step-by-Step Guide
Understand the step-up rule
When you inherit an asset, its tax basis "steps up" to its fair market value (FMV) on the date of death. This eliminates all capital gains that occurred during the decedent's lifetime.
Example: Apple stock
If the decedent bought Apple stock for $10,000 and it was worth $500,000 at death, your basis is $500,000. If you sell for $505,000, you only owe tax on $5,000 in gains — not $495,000.
Does NOT apply to IRAs/401(k)s
Retirement accounts (IRAs, 401(k)s, 403(b)s) do NOT get a step-up in basis. Distributions are taxed as ordinary income to the beneficiary, just as they would have been to the decedent.
Warning: This is the most common mistake heirs make — assuming retirement accounts get the step-up.
Document ALL fair market values immediately
For every inherited asset (stocks, real estate, collectibles, crypto), document the fair market value on the date of death. Get appraisals for real estate and hard-to-value assets. Download brokerage statements as of the death date.
Estimated time: Do this week
Document Now Checklist
- Download brokerage statements showing values on date of death
- Get real estate appraisals dated close to date of death
- Screenshot crypto prices on the date of death
- Document value of any business interests
- Save all documentation — you may need it years later when assets are sold
Last verified: June 2026. Platform policies may change. Verify current procedures directly with Step-Up in Basis — The Tax Break Families Miss. This guide is for informational purposes only and does not constitute legal advice.
Related Guides
Final Income Tax Return (Form 1040)
The final income tax return covers January 1 through the date of death. It must be filed by April 15 of the year after death. Late filing triggers penalties and interest.
Estate Income Tax (Form 1041)
Form 1041 is required if the estate generates more than $600 in gross income during any tax year while it remains open. Income includes interest, dividends, rent, and capital gains earned by estate assets after the date of death.
Estate Tax Return (Form 706)
Even if the estate is below the federal threshold, you may still need to file Form 706 to elect portability — which transfers the unused exemption to the surviving spouse. This election is critical and must be made on a timely filed Form 706.
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