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Stepped Up Basis


Definition: The date of death fair market value of an inherited asset (including stocks, bonds, and real estate) used for calculating capital gains taxes when the inherited asset is sold.

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.

Also Known As: Inherited Basis, Step Up in Basis

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