what is a step up in basis 
step up in basis refers to the adjustment in the cost basis of an inherited asset to its fair market value on the date of the decedent s death cost basis is what determines the taxes owed if any when the asset is sold cost basis starts with the price paid for an asset plus any additional costs added over time to improve or maintain the original asset 1step up in basis or stepped up basis is what happens when the price of an inherited asset on the date of the decedent s death is above its original purchase price the tax code allows for the raising of the cost basis to the higher price minimizing the capital gains taxes owed if the asset is sold later 2the step up in basis provision applies to financial assets like stocks bonds and mutual funds as well as real estate and other tangible property 3of course if the price of an asset has declined from that paid by the owner s date of death the asset s cost basis would step down instead of stepping up for heirs in practice most cost basis adjustments after death are steps up not steps down this is because financial assets passed on to heirs are often long term holdings while financial assets and real estate tend to have positive long term rates of return investopedia mira norianunderstanding step up in basisa step up in basis resets the cost basis of an inherited asset from its purchase or prior inheritance price to the asset s higher market value on the date of the owner s death 4for example let s suppose jane purchases a share of stock at 2 and dies when its market price is 15 had jane sold the stock before dying at 15 she or her estate after her death would be liable for capital gains tax on a gain of 13 instead her heir s cost basis becomes 15 so that if the stock is later sold at that price no capital gains tax would be due capital gains tax that would have been due on the rise in the share price from 2 to 15 absent jane s death is never collected tax basis is the cost of an asset to its owner as calculated and adjusted for tax purposes it is used to assess capital gains as well as depreciation amortization and depletion 5step up in basis for community property states and trustsresidents of nine community property states including california can take advantage of the double step up in basis rule the rule provides a step up in basis on community property all assets accumulated during marriage other than inheritances and gifts for the surviving spouse in other states assets owned solely by the surviving spouse do not receive the step up in basis and jointly owned assets receive only half the step up in basis they would receive in a community property state 6alaska kentucky south dakota and tennessee allow residents as well as non residents to create community property trusts qualifying held assets for community property tax treatment including the double step up in basis rule under the federal tax code 7consider ann and bill a hypothetical married couple living in a common law rather than a community property state they hold stock worth 200 000 in a joint brokerage account with a 100 000 cost basis at the time of bill s death under common law principles legislated in most states ann would be entitled to a step up in basis on bill s half of the brokerage account or 100 000 in current value but not on her half so the tax basis for stock held in the account would rise to 150 000 instead of 200 000 as in community property states or under community property trusts note that the surviving spouse anywhere in the u s would be entitled like any other heir to the stepped up basis on inherited assets previously owned solely by the deceased step up in basis as a tax loopholethe step up in basis tax provision has often been criticized as a tax loophole for the wealthiest families 8 the congressional budget office cbo has estimated over half the aggregate benefit accrues to the top 5 of taxpayers by income 9 in 2020 the cbo estimated the provision s cost in foregone tax revenues at 110 billion over a 10 year period 10some defenders of the stepped up basis have argued that eliminating it might provide a disincentive to save and subject estates to double taxation in combination with the federal estate tax 11 following the doubling of the federal estate tax exemption in 2017 a modern era record low 0 04 of adult deaths in 2020 produced an estate tax liability 12in 2021 a proposal backed by president joe biden and some democrats that would have eliminated the step up in basis for assets in excess of 2 5 million plus 250 000 for a home for a married couple failed to secure congressional approval 13