Step-Up in Basis: Why Some Assets Should Never Be Sold Before Death

Few rules in the tax code change behavior as much as the step-up in basis, and few are as poorly understood by the people it helps. It decides which assets a retiree should spend, which they should give away, and which they should hold until the end. Get it right and a six-figure tax bill can disappear without a single clever transaction.

What the step-up is

Your cost basis in an asset is what you paid for it, adjusted for things like reinvested dividends and improvements. When you sell, you pay capital gains tax on the difference between the sale price and the basis.

When you die owning an asset, its basis resets to its fair market value on the date of death. The gain that built up during your life is never taxed. Your heirs inherit the asset with the new, higher basis and can sell it the next day for no tax at all. Stock bought for $20,000 and worth $400,000 at death passes with a $400,000 basis. The $380,000 gain simply vanishes.

The rule covers taxable brokerage accounts, real estate (including a primary residence beyond the sale exclusion), business interests, collectibles, and most other property held outright or in a revocable trust. Assets that have fallen in value get a step-down, which is one more reason to sell losers during life and hold winners.

What doesn't get a step-up

Retirement accounts. Traditional IRAs, 401(k)s, and similar accounts are "income in respect of a decedent." The heir pays ordinary income tax on every dollar withdrawn, generally within ten years. A $1 million IRA is worth perhaps $650,000 to a child in the 35% bracket; a $1 million brokerage account with a stepped-up basis is worth $1 million.

Annuities. The deferred gain inside an annuity is taxed as ordinary income to the beneficiary.

Assets given away during life. A gift carries over the donor's basis. Give your child the $20,000 stock worth $400,000 and they inherit your $20,000 basis, along with a $380,000 taxable gain when they sell.

Assets in most irrevocable trusts. If you've given assets away to a trust that removes them from your estate, they aren't yours at death and don't get a step-up (though some trusts are drafted to preserve it).

Roth accounts. They don't need one. Withdrawals are already tax-free.

Spouses and joint property

When one spouse dies, jointly owned property gets a step-up on the deceased spouse's half in most states. Florida isn't a community property state, so a jointly held brokerage account with a $100,000 basis worth $500,000 gets a step-up on half: the survivor's basis becomes $50,000 (their original half) plus $250,000 (the stepped-up half), or $300,000. In community property states the entire asset steps up. Florida adopted a Community Property Trust Act in 2021 that lets married couples opt into community property treatment for assets placed in such a trust, which can double the step-up. It's a specialized tool, and worth asking an estate attorney about if you're a couple with large low-basis holdings.

What the rule means for spending

The step-up creates a pecking order for which assets to spend in retirement.

1. Spend from cash and high-basis assets first. Selling a position with little gain costs little tax.
2. Harvest gains in the 0% bracket when income is low, which resets basis upward at no cost and shrinks the eventual gain if you do end up selling.
3. Hold the lowest-basis positions. A stock or fund with a basis of 10% of its value is the last thing to sell. It's the asset that benefits most from the step-up.
4. Use the lowest-basis assets for charitable gifts if you give, because donating appreciated stock avoids the gain and produces a deduction.

For concentrated positions, this argues for unwinding the higher-basis lots and keeping a slice of the lowest-basis shares for the step-up, provided the concentration risk is tolerable.

What the rule means for gifting

Cash and high-basis assets are the right things to give family during life. Low-basis assets are the wrong things, because the gift carries the gain with it. Parents who hand a child their appreciated stock to "help with a house" have handed them a tax bill that would've been zero if the stock had passed at death. We see this one a lot.

The exception is a child in a much lower bracket who's going to sell soon. A gift of appreciated stock to an adult child in the 0% capital gains bracket (taxable income under $49,450 single in 2026) lets the child sell with no tax, subject to the kiddie tax rules for dependents under 24. A narrow case, with rules attached.

What the rule means for the estate plan

Because retirement accounts get no step-up and taxable accounts do, which heir gets which asset matters. Charities should get the IRA; children should get the brokerage account and the Roth. Trusts that will hold assets for decades should be reviewed for whether they preserve or forfeit the step-up. And with the estate tax exemption at $15 million, the old strategy of moving appreciated assets out of the estate to save estate tax now often costs more in lost step-up than it saves.

Records

The step-up only works if someone can prove the date-of-death value. For publicly traded securities the custodian records it. For real estate, a business, or collectibles, you need an appraisal at death. Heirs who sell without establishing the stepped-up basis sometimes pay tax on the full sale price because nobody documented the value.

We keep basis records by lot for every client's taxable holdings, plan which lots to sell and which to keep, and coordinate the date-of-death valuations with the estate attorney when the time comes. It's one of the quieter but larger pieces of estate planning.

Frequently asked questions

Joseph G. Valerio, CFP®, EAFounder and Lead Advisor at Valerio Wealth Management, a fee-only, fiduciary virtual family office in Miami, Florida. One advisor, credentialed in both financial planning and federal tax. About Joseph

This article is general education, not individualized advice, and it is not tax, legal, or accounting advice. Figures reflect federal law for the year stated and can change. Valerio Wealth Management does not prepare or file tax returns. Speak with a qualified professional about your own situation before acting.