For example, if a beneficiary inherits a house that cost the decedent $50,000 but on the date of the decedent's death the house had a fair market value of $100,000, then the beneficiary receives a step up in the original cost basis from $50,000 to $100,000. If the beneficiary then turns around and sells the property for $100,000, then the beneficiary will not owe any capital gains taxes. If on the other hand the beneficiary holds on to the property for many years and then sells it for $200,000, then, without having made any further improvements to the property that would increase the basis, the beneficiary will owe capital gains taxes on $100,000 (= the difference between the sales price of $200,000 and the $100,000 stepped up basis).
Note that for deaths that occurred in 2010, the heirs have the choice of receiving a stepped up basis or applying the modified carryover basis rules.
