You can spend a lifetime building wealth and lose a meaningful portion of it in a single transaction.
When passing assets to the next generation, the conversation goes far beyond deciding who receives what. It centers on how those assets will be taxed once they change hands, and whether their value is preserved or quietly reduced in the process. Many families are surprised to learn that a lack of planning around cost basis can trigger avoidable capital gains taxes, diminishing the very legacy they intended to preserve.
This is where the step-up in basis serves as a powerful provision that can significantly limit capital gains exposure on inherited assets, if structured correctly. Without understanding how it works, families may unintentionally leave behind unnecessary tax consequences.
In this article, we break down how the step-up in basis works and why it plays a critical role in passing assets efficiently and safeguarding long-term family wealth.
If you’d like to explore how this strategy applies to your estate, a financial advisor at Premier Planning Group can help you think through the details with clarity and intention.
What Is Step-Up in Basis?
Step-up in basis allows the people who inherit your appreciated assets, such as stocks or real estate, to avoid a capital gain being triggered. The basis is the value of a piece of property from which capital gains taxes are calculated when you sell the property for a profit.
Section 1014 of the Internal Revenue Code grants certain property held at your death a new basis equal to the fair market value at the time of your death. That’s the step-up in basis your beneficiary receives. The IRS also grants the inheritor a long-term capital gain rate if the property is sold.
How the Step-Up in Basis Works When Passing Assets On
All assets have a cost basis—the price you paid for something. When that asset is sold, the difference between what you paid for it and the sales price is a capital gain (or loss), and capital gains are taxed.
If you bought your home for $100,000 in 1995 and it was worth $500,000 at your death 30 years later, the capital gain would be $400,000 if sold immediately. That would be a huge tax burden on your beneficiary.
However, the step-up in basis resets the cost basis to the fair market value of $500,000 for your heir. If the house was sold immediately at $500,000, your inheritor would owe no capital gains tax. They would owe a reduced tax if the house was sold later at a higher price.
Assets That Receive a Step-Up in Cost Basis
When passing assets on to beneficiaries, not all qualify to receive a step-up in basis. Here are the assets that do:
- Real estate
- Individual stocks, bonds, and mutual funds
- Household furnishings
- Artwork
- Jewelry
- Collectibles
- Some business interests
Consider talking with a financial or wealth advisor to understand how the step-up in basis might impact your situation and assets.
The Benefits of a Step-Up in Basis
The step-up in basis can play a crucial role in estate planning, including choosing whether to sell, gift, or bequeath an asset. A step-up in basis can:
- Reset the cost basis to reduce capital gains taxes for an heir
- Lower the tax burden to preserve family wealth
- Incentivize holding assets for the long term
- Simplify tax reporting
The step-up in basis is a tool you can use in estate planning to structure assets to reduce tax burdens on inheritors.
Let’s Talk About the Smartest Way to Pass Assets to Your Heirs
Estate planning isn’t a one-size-fits-all process, and neither is passing assets to the next generation. The step-up in basis is simply one tool in a much larger toolkit, but when used thoughtfully, it can make a meaningful difference in how much of your wealth reaches your heirs instead of going toward avoidable taxes.
Many families assume that passing assets is straightforward, only to discover later that details matter, especially when appreciated investments are involved. Understanding how strategies like a step-up in basis work can help reduce unpleasant surprises and preserve more of what you’ve worked so hard to build.
At Premier Planning Group, we help you enjoy today while planning intelligently for tomorrow so your estate and legacy strategy reflect both your financial goals and your values. If you’d like to explore a smart approach to passing assets in your situation, we’re here to help.
Call our office at (443) 837-2520 or email my executive assistant, Talia Grover, at taliagrover@premierplanninggroup.com to set up a complimentary consultation.
Cetera Wealth Services, LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice.
About Brion
Brion Harris is the CEO, founder, and managing partner of Premier Planning Group, an independent financial firm specializing in working with pre-retirees and retirees, helping them create customized wealth preservation and retirement distribution strategies. With over 20 years of experience, Brion has developed deep knowledge and skill in helping his clients simplify their finances and find confidence in their financial future. Brion and the Premier Planning team are known for their unparalleled client service and their dedication building long-lasting relationships with their clients. As a result, Brion has been the recipient of the #1 Advisor Leadership Award* at Summit Brokerage Services for eight years running and has a reputation as one of the top retirement advisors in the business.
Brion is a proud 20-year resident of the Annapolis community, where he resides with his wife, Elizabeth, their three children, Addison, Jay, and Scarlett, and their two dogs, Pepper and Coco. When he’s not working, you can find him boating, skiing, traveling, and enjoying good food and music with his family. If you want to learn more about Brion, connect with him on LinkedIn.
*The #1 Advisor and Leadership Award is based on production data while at Summit Brokerage Services, Inc. Brion Harris received the award in 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021. This award is not a guarantee of future investment success. This recognition should not be construed as an endorsement of the advisor by any client.