Step-up in Basis Calculator

To calculate the exact tax savings provided by a step-up in basis, you need to know your expected capital gains tax rate in the year you sell the inherited asset. A key advantage of inherited property is that it automatically qualifies for long-term capital gains rates, regardless of how long the decedent or the heir actually held the asset.

Your long-term capital gains rate depends on your overall taxable income and filing status. Here are the projected federal thresholds for 2026:

In addition to federal capital gains taxes, higher earners must also account for the Net Investment Income Tax (NIIT) and state-level taxes:

• Net Investment Income Tax (NIIT): A 3.8% surtax applies to investment income (including capital gains) for individuals with a Modified Adjusted Gross Income (MAGI) over $200,000 (Single) or $250,000 (Married Filing Jointly).
• State Capital Gains Tax: This varies wildly by location. Nine states currently have no state income tax, while states like California tax capital gains as ordinary income, pushing the top state rate above 13.3%.

If you are coordinating an inheritance with your standard retirement withdrawals, keeping your total taxable income below the 20% bracket and the NIIT thresholds in the year you sell the asset can maximize your total wealth.

When you sell a capital asset, the IRS taxes you on the "gain"—the difference between the final sale price and your cost basis. Your cost basis is usually the original purchase price plus any capital improvements made over the years. Over decades, assets like real estate and index funds can appreciate significantly, creating a massive embedded tax liability.

The step-up in basis eliminates this historical gain. The IRS essentially forgives the tax on all appreciation that occurred during the original owner's lifetime.

There are three critical numbers involved in this process:

1. Original Basis: The price the decedent originally paid to acquire the asset.
2. Fair Market Value (FMV): The value of the asset on the exact date of death. (Executors can sometimes elect an "alternate valuation date" six months after death if it lowers the overall estate tax burden, but the date of death is standard).
3. Stepped-Up Basis: The FMV becomes the heir's new starting point for calculating future taxes.

It is important to note that the rule works in both directions. If the asset actually lost value during the decedent's lifetime, the basis is "stepped down" to the FMV at death. You cannot inherit the decedent's unrealized capital loss to offset your own taxes. The slate is simply wiped clean.

One of the most common mistakes aging parents make is attempting to simplify their estate by transferring assets to their children while they are still alive. They might add an adult child to the deed of the family home or gift shares of highly appreciated stock.

While this avoids probate, it triggers a massive tax trap known as a carryover basis.

When you are gifted an asset during the original owner's lifetime, you do not get a step-up in basis. Instead, the original owner's cost basis "carries over" to you.

For example, if your parents bought a house for $50,000 and gift it to you when it is worth $400,000, your basis is $50,000. If you sell it the next day for $400,000, you owe capital gains taxes on a $350,000 gain. If you had simply inherited the house through their will or a living trust, your basis would be $400,000, and you would owe zero capital gains tax upon selling it.

Understanding this distinction is vital when calculating your retirement needs, as unexpected tax bills can rapidly deplete an inheritance.

For married couples, the step-up rules depend heavily on where you live and how the asset is titled.

In the 41 common law states, if a married couple owns a home jointly, only the deceased spouse's half of the property gets a step-up in basis when they pass away. The surviving spouse's 50% share retains its original cost basis.

However, in the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), surviving spouses receive a massive tax advantage. If the asset is considered community property, both halves of the asset receive a full step-up in basis upon the death of the first spouse.

This is known as a "double step-up." When the first spouse dies, the surviving spouse can sell the community property asset completely tax-free. When the surviving spouse eventually passes away, the heirs get a second step-up in basis.

If you live in one of these states, you can use our specific community property step-up calculator to see how this impacts a surviving spouse's future tax liabilities. This rule is often a major factor when couples calculate their joint retirement number.

Let's look at how this plays out with real numbers using a typical inheritance scenario. Assume an adult child inherits their parents' house in 2026.

• The parents bought the house in 1995 for $150,000.
• On the date of the last parent's death, the house appraises for $650,000.
• The heir sells the house six months later for $660,000.
• The heir is in the 15% federal capital gains bracket, is not subject to the NIIT, and lives in a state with a 5% capital gains tax.

The Tax Bill Without the Step-Up Rule

If the step-up rule did not exist, the heir would be forced to use the parents' original $150,000 basis.

• Taxable gain: $660,000 - $150,000 = $510,000.
• Federal tax (15%): $76,500.
• State tax (5%): $25,500.
• Total tax bill: $102,000.

The Tax Bill With the Step-Up Rule

Because of current tax law, the heir uses the $650,000 FMV as their new basis. They are only taxed on the $10,000 of appreciation that occurred between the date of death and the sale date.

• Taxable gain: $660,000 - $650,000 = $10,000.
• Federal tax (15%): $1,500.
• State tax (5%): $500.
• Total tax bill: $2,000.

In this scenario, the step-up in basis saves the heir exactly $100,000 in taxes. This windfall can be immediately redirected into an IRA, used to fund a safe withdrawal rate strategy, or deployed to accelerate the heir's own FIRE (Financial Independence, Retire Early) journey.

The calculator applies these core formulas to determine your capital gains liability and total savings.

First, it determines your taxable gain with the step-up applied, ensuring it never drops below zero:

Gain With Step-Up = Maximum of (0, Heir Sale Price - Fair Market Value At Death)

Where:

• Heir Sale Price = the final amount you sell the inherited asset for
• Fair Market Value At Death = the appraised value of the asset on the date the original owner passed away, which serves as your new baseline

Next, it calculates the taxes you would have paid without the step-up rule (using the original owner's historical basis):

Gain Without Step-Up = Maximum of (0, Heir Sale Price - Original Purchase Price)

Total Tax Without Step-Up = (Gain Without Step-Up × Federal Rate) + (Gain Without Step-Up × State Rate) + (Gain Without Step-Up × NIIT Rate)

Where:

• Original Purchase Price = what the deceased owner originally paid to acquire the asset
• Federal Rate = your long-term capital gains bracket (0%, 15%, or 20%) based on your income
• State Rate = your state's specific capital gains tax percentage
• NIIT Rate = the 3.8% Net Investment Income Tax, applied if your income exceeds the IRS threshold

Finally, the total savings is simply the difference between the two tax scenarios:

Total Tax Saved = Total Tax Without Step-Up - Total Tax With Step-Up

A common estate planning misconception is assuming that all inherited money is completely tax-free. The step-up in basis applies specifically to capital assets: real estate, taxable brokerage accounts, physical businesses, art, and collectibles.

It does not apply to Income in Respect of a Decedent (IRD). These are assets that generated income but were never taxed during the decedent's lifetime. Because the IRS has not yet taken its cut, the tax liability passes directly to the heir.

The most common examples of assets that do not receive a step-up in basis include:

• Traditional 401(k)s and 403(b)s
• Traditional IRAs
• Unpaid wages or bonuses
• Deferred compensation plans
• Annuities and pension income survivor benefits
• US Savings Bonds (if the interest was deferred)

When you inherit a traditional 401(k), every dollar you withdraw is taxed as ordinary income at your current tax brackets, not at the lower capital gains rates. If you are unsure how these distributions affect your tax picture, review how 401(k) withdrawals are taxed in retirement.

Furthermore, you must read up on how to calculate your RMD step-by-step, as non-spouse heirs who inherit an IRA are generally required to empty the entire account within 10 years under the SECURE Act, which can cause massive tax spikes during your peak earning years.

(Note: Roth IRAs do not get a step-up in basis either, but because they are funded with after-tax dollars, their qualified withdrawals are already tax-free for heirs).

It is important to distinguish between capital gains taxes (which the step-up rule addresses) and the federal estate tax (the "death tax").

When a person dies, their total net worth is calculated. If their estate is large enough, it is subject to a 40% federal estate tax before any assets are distributed to heirs. In 2026, the federal estate tax exemption is roughly $13.99 million per individual (or nearly $28 million for a married couple).

If an estate falls below this threshold, no federal estate tax is owed, and the heirs still receive the full step-up in basis for capital gains purposes. If the estate is above the threshold, the estate pays the 40% tax on the overage, but the heirs still receive the step-up in basis on the capital assets they inherit.

Keep in mind that the current high exemption limits established by the Tax Cuts and Jobs Act are scheduled to sunset at the end of 2025. Unless Congress passes new legislation, the exemption will drop by roughly half in 2026. You can estimate potential liabilities using our estate tax calculator.