Step-Up in Basis Explained: How Inherited and Gifted Stock Are Taxed When You Sell

In 2004, Gloria bought $20,000 of stock in a large U.S. company through her brokerage account in Richmond, Virginia. By the time she died in 2026, the shares were worth $120,000. Her son Andre inherited half and sold it a month later. Years earlier, Gloria had given her daughter Keisha an identical block of shares as a gift, and Keisha sells those in 2026 too. The two siblings walk away with similar checks, yet their tax bills look nothing alike. In this example, Andre owes little or nothing, while Keisha owes capital gains tax on most of the growth.

The difference comes down to basis, the figure the IRS uses to measure your gain or loss when you sell. Inherited property and gifted property follow different basis rules, and those rules can decide whether decades of growth are taxed or not. This article walks through both, with the exceptions that trip up families most often. It is general information based on IRS publications, not tax or legal advice, and an estate's specific facts can change the answer.

Why basis is the number that matters

When you sell an investment, your taxable gain is generally the amount you receive minus your adjusted basis. If you bought the asset yourself, basis usually starts with what you paid, plus certain costs. IRS Publication 551 explains that when you get property in another way, such as by gift or inheritance, you use a different basis.

That is the whole story behind Andre and Keisha. They sold the same shares at similar prices, but they started with different basis figures, so the gains they report are very different.

Inherited property: the step-up

Publication 551 says the basis of property you inherit is generally its fair market value on the date of the decedent's death. If the estate's personal representative elects the alternate valuation date on the estate tax return, the basis is the value on that date instead. Special valuation rules can also apply to certain farm and closely held business real estate.

This is commonly called a step-up in basis when the property has grown in value. In the example, Gloria's shares had a cost of $20,000 but were worth $120,000 at her death. Andre's half carries a basis of $60,000, equal to its value on the date of death. If he sells for $61,000 a month later, his gain is about $1,000, not the $50,000 of growth that built up during Gloria's lifetime.

The rule works in both directions. If an asset is worth less at death than the decedent paid, the basis steps down to the lower value, and the loss that existed during the owner's life cannot be claimed by the heir.

The holding period bonus

Inherited property gets a second advantage that many people do not know about. IRS Publication 544 says that if you inherit property, you are considered to have held it for more than one year, regardless of how long you actually held it.

That matters because long-term capital gains are taxed at lower federal rates than short-term gains for most taxpayers. Andre's $1,000 gain from a sale one month after inheriting is treated as long-term.

Gifted property: carryover basis

Gifts made during life follow a different rule. Under Publication 551, your basis in property received as a gift is generally the donor's adjusted basis, carried over to you. Your holding period also includes the donor's holding period, according to Publication 544.

In the example, Gloria paid $20,000 for the shares she gave Keisha. Keisha's basis is $20,000 no matter what the shares were worth on the day of the gift. If she sells for $60,000, she reports a $40,000 long-term capital gain.

This is why tax professionals often point out a tradeoff in estate planning. Giving appreciated stock during life moves future growth out of the giver's estate, but the recipient inherits the giver's low basis. Holding the same stock until death can allow heirs to receive a stepped-up basis, though other financial and family considerations usually matter as much as taxes.

The dual-basis rule for gifts that lost value

Gifts of property that has fallen in value use a special rule. Publication 551 explains that when the fair market value at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you later sell at a gain or a loss.

For figuring a gain, you use the donor's adjusted basis. For figuring a loss, you use the fair market value at the time of the gift. In both cases, the basis is adjusted for anything that happened while you held the property.

An example makes this clearer. Suppose a father in Texas paid $50,000 for shares that were worth $30,000 when he gave them to his daughter. If she sells for $55,000, her gain is $5,000, measured from his $50,000 basis. If she sells for $25,000, her loss is $5,000, measured from the $30,000 value at the time of the gift. If she sells for anything between $30,000 and $50,000, such as $40,000, she has neither a gain nor a loss.

The practical lesson is that gifting a losing investment usually wastes the loss. Often it is better for the owner to sell, claim the loss on their own return, and give the cash instead.

Community property and the double step-up

Married couples in community property states can get a larger benefit when the first spouse dies. Publication 551 lists those states as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

In those states, married individuals are each usually considered to own half the community property. Publication 551 explains that when one spouse dies, the total value of the community property, including the surviving spouse's half, generally becomes the basis of the entire property, as long as at least half the value of the community interest is includible in the decedent's gross estate.

In an example, a couple in San Diego bought shares as community property for $80,000, and they are worth $200,000 when one spouse dies. The surviving spouse's basis in the whole holding generally becomes $200,000, not just a step-up on the deceased spouse's half.

In most other states, property owned jointly by spouses works differently. Generally, only the deceased spouse's share receives a step-up, and the survivor keeps the original basis on their own share. Publication 551 includes rules and examples for joint tenancy and tenancy by the entirety.

Exceptions that surprise families

A few situations do not follow the step-up rule, and they are worth knowing before you make plans.

Retirement accounts are the biggest one. Money in a traditional IRA or 401(k) is generally income in respect of a decedent, which IRS Publication 559 covers. Beneficiaries owe ordinary income tax on pre-tax money as they withdraw it, so there is no stepped-up basis to wipe out the deferred income.

Another exception involves deathbed gifts back to the giver. Publication 551 says that if you or your spouse gave appreciated property to the decedent within one year before the decedent's death, and you then receive it back, your basis is the decedent's adjusted basis before death rather than fair market value. That rule prevents a quick transfer to an ill relative just to collect a step-up.

Finally, Publication 544 notes that if an estate filed a return that increased the estate tax and you received a Schedule A of Form 8971, you must use a basis consistent with the final estate tax value of the property.

Beyond stocks: homes, rentals, and funds

The same basis rules reach well beyond shares of stock. An inherited house generally takes a basis equal to its fair market value on the date of death, which is why heirs who sell a parent's home soon after inheriting it often report a small gain or even a loss once selling costs are counted. In an example, siblings in Columbus, Ohio, inherit a house their parents bought for $90,000 decades ago. If it is appraised at $310,000 at death and they sell it for $315,000 with $20,000 in selling costs, the result is a loss on paper rather than a large gain.

Inherited rental property also starts fresh. The heir's basis is the value at death, and any depreciation the parent claimed does not carry over as a reduction to the heir's basis. If the heir keeps renting the property, depreciation generally begins again based on the new basis, following the rules in IRS publications for rental property.

Mutual funds and accounts with reinvested dividends deserve a quick look, too. For a gift, the recipient needs the donor's full basis history, including every reinvested dividend, which can be hard to reconstruct. For an inheritance, the date-of-death value replaces that history, which is one reason inherited accounts are often simpler to sort out.

Where the estate tax fits in

Many people assume the step-up only matters for wealthy estates. In fact, the basis rule generally applies to inherited property whether or not the estate owes estate tax or files an estate tax return.

For context, the IRS says the basic exclusion amount for estate and gift tax is $15,000,000 for people dying in 2026, under the law signed July 4, 2025. Most estates fall well below that, so they pay no federal estate tax. Their heirs still benefit from a stepped-up basis on appreciated assets.

When an estate must file Form 706, the executor may also need to file Form 8971 and give each beneficiary a Schedule A showing the reported value of the property. The IRS explains that the form is used to report the final estate tax value of property to beneficiaries, so their basis lines up with what the estate reported.

Documenting basis when you inherit

The step-up only helps if you can show the value on the date of death. Brokerage firms often update basis for inherited accounts, but they may not have the right figure for every asset. For publicly traded stock, the value is generally based on trading prices on the date of death. For a house, land, or a family business, an appraisal is usually needed.

Keep the death certificate, account statements around the date of death, any appraisals, the estate tax return if one was filed, and any Schedule A from Form 8971. If you sell later, these records support the basis you report on Form 8949 and Schedule D.

If you receive gifted property, ask the giver for their purchase records and the value on the date of the gift. Without those records, figuring your gain or loss can become difficult.

For Andre and Keisha, the lesson is the same: the rules are mechanical, and the paperwork is what makes them work. Before you sell inherited or gifted stock, confirm the basis in writing and get help from a tax professional when the facts are not simple.