Inherited Stock and the Stepped-Up Cost Basis

Key Takeaways

Inheriting stock is one of the few events in the tax code where a lifetime of accumulated capital gains simply disappears — not deferred, but permanently eliminated for the heir. Most people have heard "you get a step-up in basis," but the nuances of when, how much, and on which accounts that rule applies are less understood. The difference between inheriting stock in a community property state versus a joint tenancy, or the difference between an inherited IRA and an inherited taxable brokerage account, can mean tens of thousands of dollars in taxable income. This guide answers the rule and each of its exceptions in plain terms.

Direct answer: Under IRC §1014, inherited stock receives a new cost basis equal to the fair market value on the date the owner died. All capital gains that accumulated during the decedent's lifetime are permanently excluded from tax for the heir. The holding period is automatically treated as long-term regardless of when you sell. Important exceptions: IRAs and other retirement accounts do not get a step-up (they are income in respect of a decedent, taxed as ordinary income when distributed); gifted stock carries over the donor's original basis rather than stepping up; and in joint accounts held outside community property states, only the decedent's share steps up.

• The stepped-up basis equals the fair market value on the date of death (not when you sell), erasing gains from the decedent's entire holding period.
• All inherited stock is automatically treated as long-term, so any gain above the stepped-up basis is taxed at the 0%/15%/20% long-term capital gains rates.
• Community property states provide a "double step-up" — both halves of community property receive the date-of-death value, not just the decedent's half.
• IRAs, 401(k)s, and other pre-tax retirement accounts carry no step-up; distributions are fully taxable as ordinary income to the beneficiary.
• The federal estate tax exemption is $15 million per person as of 2026, made permanent by the One Big Beautiful Bill Act — the TCJA sunset did not occur.
• The alternate valuation date (six months post-death) requires the estate to actually owe estate tax, which the $15 million exemption makes rare for most families.

How IRC §1014 Works: The Core Rule

When an asset passes at death, the heir's cost basis is determined by IRC §1014, not by what the decedent paid. The general rule is simple: the basis of property acquired from a decedent is the fair market value of the property at the date of the individual's death. For publicly traded stock, fair market value on a given date is calculated as the average of the high and low trading prices on that day, per IRS rules. If the stock did not trade on the date of death, the IRS uses the average of the nearest trading dates before and after.

The mechanism behind the name "step-up" is that the decedent's original purchase price is irrelevant to the heir. If the decedent bought 500 shares at $10 each ($5,000 total) forty years ago and those shares are worth $200 each ($100,000) at death, the heir's basis is $100,000 — not $5,000. The $95,000 gain accumulated over forty years is permanently excluded from capital gains tax. The IRS does not collect it when the heir sells, and there is no deferred tax lurking in the account.

The step-up applies not only when values have increased. If the stock has lost value since the decedent bought it, the heir receives a "stepped-down" basis to the current lower value. This matters because it means the heir also loses the ability to claim the built-in loss. Planners sometimes advise selling depreciated positions before death so the loss can be realized by the taxpayer who holds it; waiting until death means the loss is permanently lost as well.

What counts as "acquired from a decedent"

IRC §1014(b) lists specific situations that qualify. The most common are property passing by bequest, devise, or inheritance from a decedent; property passing from the decedent to a surviving spouse under the marital deduction; and property passing through a revocable living trust that the decedent held. Property held in an irrevocable trust established well before death generally does not qualify — the basis is determined when the trust was funded, not at death.

Practical checklist

• Pull broker statements showing the stock's closing price on the exact date of death — brokers often provide a "date-of-death valuation" letter upon request.
• If the stock didn't trade that day (a weekend, holiday, or thinly traded security), average the nearest prices before and after per IRS guidance.
• If the estate filed Form 706, the per-share values reported there are authoritative and your broker needs to match them.
• Do not assume the basis the broker shows in your account is correct — it is sometimes the decedent's original cost until you correct it.

Worked Example: The Tax Impact in Numbers

Illustrative scenario — for education only.

Consider two siblings, Alex and Morgan, whose parent owned 1,000 shares of a stock purchased years ago at $15 per share ($15,000 total cost). At the parent's death, the shares trade at $85 per share ($85,000 total value). Both scenarios below show the same starting position at death; what differs is what happens next.

In Scenario A, the heir in a 15% long-term capital gains bracket owes $2,250 in federal tax on the $15,000 post-death gain. In Scenario B, the recipient of the gift owes $12,750 on the $85,000 gain (the entire appreciation from the original purchase price). The difference — $10,500 — is the value of the stepped-up basis in this example. At a 20% rate (higher-income heir), that gap grows to $14,000 in saved federal tax, not counting applicable state taxes.

The takeaway for planning purposes: from a pure capital-gains-tax standpoint, highly appreciated shares are usually worth more to a family member as an inheritance than as a lifetime gift. The gift tax annual exclusion ($18,000 per recipient per year in 2026) covers small gifts, but large blocks of appreciated stock are generally better left in the estate to receive the step-up.

Automatic Long-Term Holding Period

Under IRC §1223(11), inherited property is treated as held for more than one year, regardless of how long the heir actually holds it before selling. This matters in two ways. First, the heir's own holding period does not start from zero at death — even if you sell inherited shares on the day you receive them, the gain is long-term. Second, there is no minimum waiting period to reach the long-term rate. You cannot accidentally create a short-term gain by selling quickly after inheriting.

The practical consequence is that heirs are never penalized for selling promptly. If the estate's distribution plan or the heir's personal financial situation calls for liquidating inherited shares immediately, the tax treatment is exactly the same as if the heir had held the position for years. Long-term capital gains rates in 2026 are 0% for taxpayers below roughly $47,000 in taxable income, 15% for most middle-income filers, and 20% for those above approximately $533,400 (single) or $600,000 (married filing jointly). These thresholds are inflation-adjusted annually.

The Alternate Valuation Date: When It Can Apply

IRC §2032 gives the executor of an estate the option to value assets as of six months after the date of death — the "alternate valuation date" — instead of on the date of death itself. The purpose of the provision is to prevent estates from being devastated by a market crash occurring between death and the filing of the estate tax return. But two strict conditions must both be satisfied for the election to be available:

1. The alternate valuation must reduce the gross value of the taxable estate (the portfolio must have declined in the six months after death).
2. The alternate valuation must also reduce the estate tax owed (the estate must actually owe estate tax at the full value; otherwise there is nothing to reduce).

The second condition is the controlling one for most families. As of 2026, the federal estate tax exemption is $15 million per person and $30 million for married couples using portability. The One Big Beautiful Bill Act (signed July 4, 2025) permanently established this level and indexed it for inflation from 2025 forward. The pre-OBBBA scheduled sunset to approximately $7 million did not occur. Because estates below $15 million owe no federal estate tax, they cannot satisfy the second condition and cannot elect the alternate valuation date, regardless of how much their portfolios fell after death.

For the relatively small number of estates that do exceed the exemption, the alternate valuation date can produce a lower basis for the heir as well as a lower estate tax bill — the two outcomes are linked. An executor who elects it is trading a lower estate tax liability for a lower stepped-up basis on every asset in the estate. For assets likely to be sold promptly, a lower basis increases future capital gains taxes; for assets held long-term, the estate-tax saving may outweigh the basis reduction. This is a calculation an estate attorney or CPA should run estate-specifically.

Portability and the marital deduction

Portability allows a surviving spouse to use the deceased spouse's unused estate tax exemption by filing an estate tax return (Form 706) within nine months of death (extendable to 15 months). Portability does not affect stepped-up basis directly — it is a mechanism for preserving unused exemption to protect the surviving spouse's own estate later. However, it does interact with the decision to file Form 706: estates below the exemption that would not otherwise need to file may still choose to do so solely to lock in portability. In that case, the date-of-death values reported on Form 706 also become the authoritative basis for the heir's holdings.

Community Property States: The Double Step-Up

One of the most significant planning advantages in estate law applies only to married couples living in community property states. IRC §1014(b)(6) provides that when one spouse in a community property marriage dies, both halves of the community property receive a stepped-up basis — not just the decedent's half. The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

In practice, this means a surviving spouse in California who inherits half of a joint stock portfolio effectively gets a full reset on the entire portfolio, including their own half, to the date-of-death fair market value. In a common-law state with the same portfolio held in a joint tenancy with right of survivorship (JTWROS), the surviving spouse's half retains its original carryover basis while only the decedent's half steps up.

Couples who move from a community property state to a common-law state (or vice versa) may still benefit from community property treatment on assets acquired while they were residents of the community property state — but the analysis depends on state law and asset titling. Couples who recently relocated should verify with a local estate attorney which assets retain community property character.

Community property held in a revocable living trust generally retains its community property character for IRC §1014(b)(6) purposes, but this depends on how the trust is drafted and state law. Again, a local estate attorney is the right resource for specific situations.

Joint Accounts: Only the Decedent's Half Steps Up

In a common-law state, a brokerage account held as joint tenants with right of survivorship (JTWROS) between two people — most often spouses, but sometimes parent and adult child — steps up only on the decedent's share. The default assumption for a two-person JTWROS account is that each person owns 50%, so 50% of the cost basis steps up at the first death. The surviving joint tenant's half retains whatever basis it had before.

This matters because it means inherited JTWROS assets in a common-law state never get the full double-step-up that community property receives. If a parent and adult child hold a $300,000 stock position in JTWROS with an original combined cost of $40,000, and the parent dies, only the parent's $150,000 (50%) gets a step-up. The child's $20,000 basis on their half is unaffected. The combined basis after death is $170,000 (parent's $150K stepped up + child's $20K original).

Tenancy-in-common interests are governed by a slightly different rule: the step-up applies to the portion actually included in the decedent's gross estate, which is their percentage ownership interest. For an equal tenancy-in-common between two parties, 50% steps up, same as JTWROS.

One important planning note: some families add adult children to brokerage accounts as joint tenants as an estate-planning shortcut. From a tax standpoint, this eliminates the full step-up the child would have received on 100% of the account had they inherited it entirely at death. In many cases, leaving the account titled solely in the parent's name and letting it transfer by beneficiary designation or will preserves a larger step-up.

Carryover Basis Exception: Gifts vs. Inheritances

The step-up in basis is one of the sharpest distinctions between receiving property as a gift versus inheriting it. They often feel similar — in both cases an asset moves from one family member to another without a sale — but the tax treatment is fundamentally different.

Gifts carry over the donor's original basis. Under IRC §1015, when you receive a gift, your basis is the lower of (a) the donor's adjusted basis at the time of the gift, or (b) the fair market value at the time of the gift if the property has declined in value. If you later sell at a gain, you owe tax on the gain above the donor's original cost. If you sell at a loss, your basis is the fair market value at the date of gift (you cannot use the larger carryover basis to manufacture a loss). The donor's holding period also carries over for purposes of determining long-term versus short-term gain.

Inheritances step up the basis. Under IRC §1014, the heir's basis is the fair market value at death. The decedent's original cost, holding period, and any built-in gain all disappear for the heir.

For appreciated assets, the tax consequence of receiving a gift can be far worse than inheriting. If a parent gifts stock worth $80,000 that cost them $5,000, the recipient's basis is $5,000. If the same stock is inherited at the parent's death when it is still worth $80,000, the basis is $80,000. The $75,000 in embedded gain is permanently excluded in the inheritance scenario; it follows the recipient in the gift scenario until they sell.

See also: Gifting Stock: Tax Implications for a full treatment of how gift basis, gift tax annual exclusions, and gift tax reporting interact for donors and recipients.

IRAs and Retirement Accounts: No Step-Up at Death

One of the most costly misunderstandings about inherited assets is assuming that all inherited accounts get a stepped-up basis. Traditional IRAs, 401(k)s, 403(b)s, SEP-IRAs, and similar pre-tax retirement accounts do not. They are classified under IRC §691 as "income in respect of a decedent" (IRD) because the decedent never paid income tax on the contributions or on the investment growth that accumulated inside the account.

When a beneficiary inherits a traditional IRA and withdraws funds, every dollar is taxed as ordinary income at the beneficiary's marginal tax rate — exactly as it would have been taxed to the decedent. The appreciated market value of the assets inside the account does not become the basis; there is no basis step-up at all. The basis in a traditional IRA is generally zero (or equal to any non-deductible contributions the decedent made and documented on Form 8606).

The SECURE Act 2.0 rules and their ten-year distribution requirement for most non-spouse beneficiaries mean that large inherited IRAs can force significant taxable distributions over a compressed window, pushing beneficiaries into higher marginal brackets. This is the opposite of the stepped-up basis benefit: instead of eliminating embedded gains, the inheritance of a traditional IRA accelerates tax obligations.

Roth IRAs are different. Roth accounts also do not get a stepped-up basis (the basis concept does not really apply since qualified distributions are already tax-free), but inherited Roths generally remain tax-free for the beneficiary during the distribution period, which is a substantial advantage.

The practical implication: when evaluating an estate's after-tax value, a $1 million taxable brokerage account with a full step-up is worth $1 million after-tax (if sold at the stepped-up value). A $1 million traditional IRA is worth approximately $700,000 to $800,000 after-tax for a beneficiary in the 24% bracket, and potentially less at higher rates. These are not equivalent assets from a tax standpoint, even if they show the same dollar value on a statement.

Estate Tax Interaction: The $15 Million Exemption and Portability

The federal estate tax and the step-up in basis are related but separate systems. Understanding both is important because they can pull in different directions for very large estates.

The federal estate tax applies to the taxable estate above the applicable exclusion amount — $15 million per person ($30 million for married couples using portability) as of 2026, indexed for inflation going forward. The One Big Beautiful Bill Act eliminated the TCJA's scheduled sunset, so the exemption level did not revert to the pre-2018 range of approximately $7 million as many had expected before July 2025. State estate taxes still apply in some states (Massachusetts, Oregon, Washington, and others), with exemptions often well below the federal level.

For estates above the federal exemption, the estate tax rate is 40%. A key interaction: the stepped-up basis that helps heirs avoid capital gains tax does not reduce the estate tax. An estate can simultaneously owe 40% estate tax on the value of an asset and provide the heir with a step-up that eliminates embedded capital gains. Both things happen at once.

Portability. When a spouse dies without using their full estate tax exemption, the surviving spouse can preserve the unused exemption by filing Form 706 within nine months of death (extendable to 15 months). This "deceased spouse's unused exclusion amount" (DSUE) can be added to the surviving spouse's own exemption, effectively doubling the shield against estate tax. Portability applies only between spouses and must be elected on a timely-filed return — it does not happen automatically.

For most families with estates below $15 million, the estate tax is not a current concern given the 2026 exemption level. The stepped-up basis remains highly valuable regardless of estate size, because it applies to all taxable estates, not only those above the exemption.

Practical Steps: Getting the Right Basis on Inherited Stock

The step-up is automatic under the law, but heirs who don't actively establish and document the date-of-death basis risk paying too much tax when they sell — or running into IRS discrepancies because the brokerage shows the decedent's original cost instead of the stepped-up value.

Step-by-step checklist

1. Request a date-of-death valuation letter from the broker. Most major brokerages provide this document, which shows the per-share value (average of high/low prices on the date of death) and the total stepped-up value of each position. Ask for it in writing, not just verbally.
2. Confirm whether the estate filed Form 706. If the estate was large enough to require a federal estate tax return (or chose to file for portability purposes), the per-asset values on Form 706 are authoritative. Request a copy if you are a beneficiary.
3. Check your broker's cost basis records. When inherited shares are transferred to your account, the broker should update the cost basis to the stepped-up value. This does not always happen automatically. Log into your account, navigate to cost basis settings, and confirm the per-share basis matches the date-of-death valuation.
4. Confirm account type. Verify that the account receiving the shares is a taxable brokerage account, not an IRA. If the shares came from the decedent's IRA, the no-step-up IRD rules apply, and any gain in the shares is ordinary income to you when distributed — not a capital gain.
5. Determine ownership structure. Was the account held individually by the decedent? As JTWROS? As community property? The answer determines whether you get a full step-up, a half step-up, or (in community property states) a double step-up.
6. Track dividends reinvested after the date of death. Any dividends reinvested after death establish their own separate cost basis at the reinvestment price — they are not part of the stepped-up basis and will create their own gain or loss when those specific shares are sold.
7. Keep records indefinitely. There is no statute of limitations problem until you sell, but sales you make years later will require documentation of the stepped-up basis. Store the date-of-death valuation letter, Form 706 excerpts, and broker statements permanently.

Misconceptions Versus Reality

Common Mistakes When Dealing With Inherited Stock

Assuming all inherited assets get the step-up. The most expensive mistake is treating an inherited IRA like an inherited taxable brokerage account. Both are "inherited assets," but the IRA distribution is ordinary income while the taxable account liquidation is a capital gain (or zero gain if sold at the stepped-up basis). Running them through the same mental model produces the wrong answer on tax forms and can result in significant underpayment.

Failing to document the date-of-death value promptly. For large, illiquid, or thinly traded positions, the fair market value on the date of death can be genuinely difficult to establish years later. Broker records may not retain the historical data you need. Requesting a formal valuation letter immediately after inheriting is far easier than reconstructing it at audit time.

Adding joint owners to avoid probate without thinking about basis. Some parents add an adult child as a joint tenant on a brokerage account to avoid the probate process. While that may streamline the transfer, it converts what would have been a full step-up (the child inheriting 100% of the account) into a half step-up (only the parent's 50% share steps up). For highly appreciated accounts, the tax cost of this convenience can easily outweigh the probate savings. A beneficiary designation on the account, or holding the account in a living trust, often achieves the same non-probate transfer while preserving the full step-up.

Overlooking community property character after a move. A couple who spent thirty years in California, accumulating a large stock portfolio, then retired to Florida does not automatically convert their community property to separate or jointly-owned property under Florida law. If the community property character is preserved (which often requires careful titling and documentation), the double step-up still applies when the first spouse dies. Couples who have moved between community and common-law states need a local estate attorney to confirm the characterization of their assets before assuming how the step-up will work.

Ignoring state estate taxes. The $15 million federal exemption is generous enough that the alternate valuation date and estate tax planning are largely moot at the federal level for most families. But Massachusetts, Oregon, Washington, and several other states have their own estate taxes with exemptions as low as $1 million. State estate taxes don't directly affect the stepped-up basis (states follow the federal rule), but they do affect whether professional estate planning is warranted.

Risks, Limitations, and Exceptions

• This guide describes federal tax treatment. State income taxes on capital gains vary by state and are not covered here; some states do not conform to the federal long-term preferential rate.
• The net investment income tax (NIIT) of 3.8% applies to capital gains for higher-income taxpayers above the $200,000/$250,000 threshold; the stepped-up basis reduces gain but does not eliminate exposure to NIIT on gains above the stepped-up value.
• Property held in an irrevocable trust (including a bypass trust established during the decedent's lifetime) may not receive a step-up at the grantor's death — the analysis depends on the trust structure and applicable IRC provisions. Revocable trusts generally do receive the step-up.
• Non-resident alien decedents and beneficiaries are subject to different withholding and reporting rules under FIRPTA and the IRC provisions governing nonresident aliens; the basic step-up may apply but other rules layer on top.
• Congress has periodically proposed eliminating or restricting the step-up in basis; as of August 2026 no such legislation has passed, but the provision has political exposure and could change in future tax bills.
• None of this guide constitutes personalized legal, financial, or tax advice. Consult a CPA or estate attorney for guidance specific to your estate, state of residence, and tax situation.

Frequently Asked Questions

Sources and Methodology

This guide describes federal tax treatment of inherited stock under the Internal Revenue Code, based on publicly available IRS guidance and relevant statutory provisions as of August 2026. Key sources include:

• Internal Revenue Code §1014 — the primary statutory authority for the stepped-up basis rule, including §1014(b)(6) for community property and the general fair-market-value-at-death rule.
• IRC §1015 — the carryover basis rule for gifts, which governs the contrast between gifted and inherited stock described in this guide.
• IRC §691 — the income in respect of a decedent (IRD) provision governing inherited retirement accounts.
• IRC §1223(11) — the automatic long-term holding period rule for inherited property.
• IRC §2032 — the alternate valuation date election for estate tax purposes.
• One Big Beautiful Bill Act (signed July 4, 2025) — permanently established the federal estate tax exemption at $15 million per person indexed for inflation from 2025, eliminating the TCJA sunset previously scheduled for January 1, 2026.
• IRS Publication 551 (Basis of Assets) and Publication 559 (Survivors, Executors, and Administrators) — IRS guidance documents covering the practical application of these rules for heirs and executors.

This content was reviewed by the Swoopr Editorial Team in August 2026. Tax law is subject to change; verify current rules, rates, and exemption thresholds directly with the IRS or a qualified tax professional before relying on any specific figure in this guide.

Conclusion

The stepped-up basis is one of the most powerful tax benefits in the Internal Revenue Code for heirs, and one of the most misunderstood. The core rule is elegant: inherit stock, get its date-of-death value as your cost basis, and sell whenever you want at long-term rates with no legacy of the decedent's original purchase price following you. The complications are in the exceptions — the half-step-up in joint accounts in common-law states, the double step-up in community property states, the complete absence of any step-up in inherited IRAs, and the carryover basis trap in gifts that look like inheritances but aren't. Understanding which rule applies to which asset in which account in which state is the actual work. Getting it right protects a meaningful amount of after-tax value; getting it wrong can mean paying tax on gains that the law was designed to eliminate.

Related Reading

• Stock & Investment Taxes — the parent hub for this content group, covering capital gains rates, wash-sale rules, dividend taxation, and more.
• Gifting Stock: Tax Implications — how gift basis, the annual exclusion, and gift tax reporting work for donors and recipients, with a direct comparison to inherited basis.