Understanding Stepped-Up Basis Rules for Inherited Assets
Posted by Cheryl A. Jankowski on March 27, 2025
The federal gift and estate tax exemption amount is set at $13.99 million for 2025, which means most people won’t be liable for these taxes. However, capital gains tax on inherited assets can still be a significant concern.
Fortunately, the stepped-up basis rules can help reduce the capital gains tax for family members who inherit your assets. When an asset is inherited, its tax basis is adjusted to the fair market value at the time of the original owner's death. This means that if the heir sells the asset later, they will owe capital gains tax only on the appreciation after the date of death, rather than on the entire gain from when the asset was originally acquired.
Capital Gains Tax Basics
Capital gains tax is applied when assets such as securities are sold for a profit. If the assets have been owned for more than one year, the gain is taxed at favorable rates. The maximum tax rate on long-term capital gains is 15%, but it increases to 20% for certain high-income individuals. On the other hand, short-term capital gains are taxed at ordinary income tax rates, which can be as high as 37%. Gains and losses are accounted for when filing a tax return, so high-taxed gains may be offset wholly or partially by losses.
The taxable gain is the difference between the basis of the asset and the sale price. For example, if you acquire stock for $10,000 and then sell it for $50,000, your taxable capital gain is $40,000. These basic rules apply to capital assets owned by an individual and sold during their lifetime. However, inherited assets follow a different set of rules.
How Stepped-Up Basis Works
When assets are inherited, there’s no income tax liability until the assets are sold. The basis for calculating gain is “stepped up” to the value of the assets on the date of the original owner's death. This means that only the appreciation in value since the date of death is subject to tax, while the appreciation during the original owner's lifetime goes untaxed.
Assets affected by the stepped-up basis rules include securities, artwork, business interests, investment accounts, real estate, and personal property. However, these rules don’t apply to retirement assets such as 401(k) plans or IRAs.
Decline in Asset Value
If an asset declines in value after the original owner acquired it, the adjusted basis of the asset the heir inherits is still the value on the date of death. This could result in a taxable gain on a subsequent sale if the value rebounds after death, or a loss if the asset’s value continues to decline.
Seek Professional Help
Without the stepped-up basis rules, your beneficiaries could face much higher capital gains taxes when they sell their inherited assets. If you have questions regarding these rules, please contact us.
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Cheryl has extensive experience working with business owners and individuals on minimizing taxes, with a focus on succession planning. With a thoughtful approach, Cheryl helps clients explore their long-term goals and plan accordingly. Leveraging Cheryl’s expertise in this area, the goal is to implement plans that achieve the wishes of the client and provide for tax-efficient transitions. Cheryl’s passion for working with corporations and individuals has allowed her to become a trusted business advisor. She has worked with clients not only in the Western New York region but also throughout the country. The breadth of this experience has allowed her to collaborate with other professional advisors to ensure that plans are flexible and innovative in the ever-changing world in which we live. Cheryl started her career with the Firm in 1991 and rejoined in 2019 adding additional strength to the tremendous talent of the Lumsden McCormick tax team.