Inherited $400K in One Stock: Unwind Without a Tax Hit

The decision: Maria inherits $400,000 of one stock

Maria, age 58, files single and lives in Ohio. Her father died in March 2026 holding 4,000 shares of a single industrial company — worth $400,000 on his date of death. He had bought those shares in the 1990s for about $40,000. Maria’s question is the one almost every heir asks: “If I sell, do I owe tax on the $360,000 my father gained?”

The answer is no. Under IRC §1014, Maria’s cost basis in the shares is not her father’s $40,000 — it is the $400,000 date-of-death fair market value. The $360,000 of appreciation he built over 30 years is never taxed to anyone. If Maria sells the entire position in April 2026 for $402,000, her taxable gain is just the $2,000 the stock rose after her father died — not $362,000. At her income, the tax on that $2,000 is a few hundred dollars.

That single fact — the basis reset — flips the entire diversification decision. A person holding $400,000 of one stock they bought themselves is trapped: selling triggers a six-figure tax bill, so they hold and pray. Maria has no such trap. She can sell all 4,000 shares this week and rebuild a diversified portfolio for essentially zero tax cost.

What §1014 actually does: the step-up in basis

When you inherit property, your cost basis becomes its fair market value on the decedent’s date of death — not the price they originally paid. For publicly traded stock, “fair market value” is the average of the high and low trading prices on that date. This is the step-up in basis, and it is one of the largest breaks in the entire tax code.

Here is why it is so powerful. Normally, capital gains tax is owed on the difference between your sale price and what you paid. The decedent’s embedded gain — $360,000 in Maria’s case — would have been taxable if they had sold. But at death, §1014 resets the clock. Neither the estate nor the heir ever pays income tax on that pre-death appreciation. It simply disappears for income-tax purposes.

One more gift baked into the rule: inherited stock is always treated as long-term, regardless of how long you actually hold it. So even if Maria sells the day after the shares transfer to her, any post-death gain is taxed at the favorable long-term capital gains rates — never the higher short-term (ordinary income) rates.

Step-up vs. the decedent’s original basis

Compare the two starting points. Had Maria’s father sold during his lifetime, his gain would have been $360,000, taxed at 15–20% federal plus the 3.8% NIIT — a bill north of $54,000. Because he held until death, that liability vanished. Maria inherits the position clean and pays $300 to fully unwind it.

The post-death gain: the only thing you actually pay tax on

Once the basis is stepped up, the only taxable event left is appreciation after the date of death. That gain is taxed at the long-term capital gains brackets for 2026:

On top of those rates, the Net Investment Income Tax (NIIT) adds 3.8% under IRC §1411 on the lesser of net investment income or modified AGI over $200,000 (single) / $250,000 (MFJ). For a high-income heir, that pushes the top effective rate on the post-death gain to 23.8%. But note what is being taxed: only the appreciation since the date of death. If Maria sells fast, that number is tiny — the $2,000 in our example. The NIIT on $2,000 would be $76 even if she were over the threshold.

This is the core insight that flips the “sell or hold” calculus. The longer you hold, the more post-death gain accrues — and that is the only slice that is ever taxable. Speed reduces your tax. The opposite of a position you built yourself.

Community property states: the full double step-up

If the inherited stock was owned jointly by a married couple, where they lived matters enormously. The nine community property states — California, Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — grant a full step-up on the entire position when the first spouse dies, not just the deceased spouse’s half.

• Common-law state (Ohio, where Maria lives): if a married couple jointly held $400,000 of stock and one spouse died, only the deceased spouse’s $200,000 half steps up. The survivor keeps their original (low) basis on the other half.
• Community property state (e.g., California): the entire $400,000 steps up to date-of-death value when the first spouse dies. The surviving spouse can sell the whole position tax-free.

For a surviving spouse in a community property state, this “double step-up” can erase hundreds of thousands of dollars of embedded gain in one stroke — and it is the single strongest argument for unwinding a concentrated jointly held position immediately after the first death rather than waiting.

Worked unwind: Maria’s glide path from one stock to a portfolio

Maria decides to diversify. Because her basis is $400,000 and the shares are worth $402,000, she has no tax reason to phase the sale — the entire embedded gain is gone. Here is her actual plan:

1. Confirm the stepped-up basis on the brokerage statement. When the account retitles into her name, the custodian re-bases each lot to date-of-death value. She pulls the date-of-death account statement and verifies the $400,000 figure before selling.
2. Sell the full 4,000 shares. No phasing needed. Her taxable gain is the $2,000 of post-death appreciation, automatically long-term, taxed at 15% — roughly $300.
3. Reinvest the $402,000 the same week into a diversified, low-cost portfolio (broad-market index funds, bonds appropriate to her age and goals). She has now eliminated single-stock risk for a $300 tax cost.
4. Check her bracket before year-end. Her ordinary income plus the $2,000 gain stays well within the 15% LTCG band ($48,351–$533,400 single), so no surprise rate jump.

Contrast this with someone who built a $400,000 position from $40,000 of their own purchases: selling it all at once would generate a $360,000 gain, $54,000+ in federal tax, and a real reason to spread sales over years to manage brackets. Maria’s inherited position carries none of that friction.

What most people get wrong about inherited stock

The most common and most expensive myth: “I’ll owe tax on everything the stock gained, so I’d better hold it.” This is exactly backwards. Holding a concentrated inherited position to “avoid the gain” protects a gain that no longer exists — the step-up already erased it. All holding does is keep you exposed to the risk of a single company while letting more taxable post-death appreciation accrue.

Three more traps to avoid:

• Confusing inherited IRAs with inherited brokerage stock. The step-up applies to taxable (non-retirement) accounts. Stock held inside a traditional IRA does not get a step-up — inherited IRAs follow the SECURE Act 10-year drain rule (IRC §401(a)(9)(H)), and withdrawals are taxed as ordinary income. Different rules entirely. Check which account the stock sits in.
• Assuming the alternate valuation date applies. Basis is normally the date-of-death value, but if the estate filed Form 706 and elected the alternate valuation date, basis is the value six months later. For most estates under the $13.99M federal exemption, no 706 is filed and the date-of-death value governs. Confirm before you compute your gain.
• Forgetting that a gift is not an inheritance. If the original owner gifted the stock to you while alive, you take their carryover basis ($40,000), not a stepped-up basis — and selling would trigger the full gain. The step-up only applies to assets received because of someone’s death.

Does the estate owe estate tax? Usually not

Heirs often conflate the income-tax step-up with the federal estate tax. They are separate. The federal estate tax only applies to estates above the $13.99M per-individual exemption for 2026 (IRC §2010), with a 40% top rate above that line. A $400,000 stock position — or even a multi-million-dollar estate — is nowhere near that threshold. Maria’s father’s estate owes no federal estate tax, and Maria owes no income tax on the inheritance itself.

Watch your state, though. Eighteen states levy an estate or inheritance tax, often at far lower thresholds — Oregon at $1M, Massachusetts at $2M, Washington at $2.193M. Ohio, where Maria lives, has neither, so she is clear. If you live in a state with an inheritance tax (such as Pennsylvania, New Jersey, or Kentucky), check whether your relationship to the decedent triggers a state-level bill even when the federal estate tax does not.

The decision lever

For inherited stock, the lever is the date of death, not your purchase history. The step-up under IRC §1014 reset your basis to fair market value, erased the decedent’s embedded gain, and stamped the shares as automatically long-term. That means the only tax you face is on appreciation since the death — a number that shrinks the faster you act. If you are sitting on a concentrated inherited position, the diversification math is not “sell and eat a big tax bill.” It is “sell now, pay almost nothing, and stop betting your inheritance on one company.” Confirm the stepped-up basis on the date-of-death statement, sell, and rebuild a diversified portfolio — ideally within the same window, before post-death gains have a chance to build.