Step-Up Basis on Inherited Stock: How Section 1014 Wipes Out Lifetime Appreciation
The single largest tax preference baked into the US estate-tax system, and the one most beneficiaries fail to optimize for.
Internal Revenue Code Section 1014 grants beneficiaries of inherited assets a basis step-up: the cost basis of inherited stock, real estate, or other capital property is reset to the fair market value as of the decedent's date of death. Lifetime appreciation simply disappears for tax purposes.
For long-tenured employees holding decades of company stock, or for elderly parents holding low-basis blue-chip positions, the step-up can be the difference between heirs paying $300K of capital gains tax and paying zero. This guide covers the §1014 rule, the assets it does NOT apply to, the planning implications, and the calculator below estimates step-up savings on a sample inheritance.
Step-up basis at a glance
Interactive calculator
Estimates only. Consult a licensed CPA or fee-only fiduciary for advice specific to your situation.
Section 1014 step-up at death wipes out lifetime appreciation. Does not apply to Roth IRAs (already tax-free) or Traditional IRAs (still ordinary-income on distribution). State estate tax may still apply.
What does NOT get step-up: IRD assets
Income in Respect of a Decedent (IRD) — Traditional IRAs, 401(k)s, deferred annuities, savings bonds with accumulated interest, and certain installment-sale receivables — does not receive step-up basis. The original tax character carries through to the beneficiary.
This is the source of much confusion. Most heirs assume "inheriting an IRA" works the same as inheriting stock — it doesn't. Inherited Traditional IRAs are taxable on every distribution, and SECURE Act rules require non-spouse beneficiaries to drain the account within 10 years. Plan accordingly.
Estate-planning implications: hold, don't gift
If you have low-basis appreciated assets and your estate is below the federal exemption ($13.99M in 2025, ~$7M starting 2026), holding until death gets your heirs a $0-tax exit. Gifting those same assets during life uses carryover basis — heirs inherit your original cost and owe tax on every dollar of appreciation when they sell.
This creates a key planning rule: gift CASH or HIGH-basis assets, hold LOW-basis appreciated assets to bequeath. Real estate held for decades, founder stock, and long-tenured employer-stock positions are textbook candidates for the hold-and-bequeath strategy. Annual exclusion gifts ($18K/recipient/year in 2025) should be cash, not appreciated stock, when possible.
Real-world scenarios
Linda's father bought Microsoft in 1995 with cost basis $50K. He held until his death in 2025; the position was worth $500K. Linda inherits and sells immediately.
Without step-up, she would owe ~$107K in federal capital-gains tax (23.8% combined LTCG + NIIT) plus state tax on the $450K gain. With §1014 step-up, her basis is $500K. She sells at $500K, realizes $0 gain, owes $0 tax. The step-up saved roughly $107K federal plus state.
Jorge's parents owned a rental in Houston as community property. Original basis $200K, market value at second-parent's death $1.2M. They had taken $180K of depreciation.
Texas is community-property: at the second death, both halves of the property get a fresh step-up to $1.2M. Depreciation recapture is also wiped out. Jorge's basis is $1.2M. If he sells immediately for $1.2M he owes $0. If he keeps and rents, his depreciation schedule restarts on $1.2M.
A wealthy grandfather dies in 2025 with $20M in stock with $2M basis. Federal estate exemption is $13.99M. The estate is taxable at the federal level for the $6M overage at 40%.
Step-up still applies — heirs receive stock at $20M basis. The $2.4M federal estate tax must be paid from the estate, but heirs avoid the lifetime $18M capital gain when they sell. The combined estate-tax + zero-capital-gain treatment is still very beneficial for heirs vs. an alternative gift-during-life strategy where carryover basis would have triggered taxes on the $18M gain on top of any gift-tax consequences.
Tools and providers
Frequently asked
No. Pre-tax retirement accounts are Income in Respect of a Decedent (IRD). Beneficiaries pay ordinary income tax on every distribution. Roth IRAs already grow tax-free, so no step-up is needed.
Estates can elect to use a date six months after death instead of the date of death — but only if doing so reduces both the estate's gross value AND the federal estate tax. Used when asset values are declining post-death (e.g., during a market crash).
No. Gifts use carryover basis: the recipient's basis equals the donor's original basis. If your dad bought Apple at $1 and gives it to you while alive at $200, your basis is still $1. If he holds until death, your basis becomes $200. This is why holding low-basis stock to bequeath is often more tax-efficient than gifting it.
In community-property states (CA, TX, AZ, NV, ID, LA, NM, WA, WI), at the death of the first spouse BOTH halves of community property get a fresh step-up — not just the deceased spouse's half. This is a meaningful advantage over common-law states where only the deceased spouse's portion gets stepped up.
Yes — under specific conditions: gifted assets received within 1 year of the donor's death where the donor receives the asset back at death; certain joint-with-rights-of-survivorship registrations where contribution can't be traced; and inherited assets sold by the estate before distribution can complicate basis tracking. Document and engage an attorney for non-trivial estates.
Proposals to eliminate or limit step-up have been floated multiple times over the past decade and have not passed. As of 2026 the rule remains. Plan based on current law but watch for legislative changes.
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