Step-Up In Basis

Step-Up In Basis

The increased cost basis of securities or other assets one has inherited. A step-up in basis is the fair market value of the securities at the time they are inherited, rather than when they were bought. For example, suppose a benefactor buys 10 shares at $10 per share in 1990 and dies in 2009, when they are $20 per share. The step-up in basis of those shares for the person to whom that benefactor wills those 10 shares is $20. This means that the person will be treated as if he/she bought the shares at $20 for tax purposes. A step-up in basis exists to limit the capital gains tax liability for persons who inherit stocks and other assets.

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Step-up in basis. When you inherit assets, such as securities or property, they are stepped-up in basis.

That means the assets are valued at the amount they are worth when your benefactor dies, or as of the date on which his or her estate is valued, and not on the date the assets were purchased. That new valuation becomes your cost basis.

For example, if your father bought 200 shares of stock for $40 a share in 1965, and you inherited them in 2000 when they were selling for $95 a share, they would have been valued at $95 a share.

If you had sold them for $95 a share, your cost basis would have been $95, not the $40 your father paid for them originally. You would not have had a capital gain and would have owed no tax on the amount you received in the sale.

In contrast, if your father had given you the same stocks as a gift where there is no step-up, your basis would have been $40 a share. So if you sold at $95 a share, you would have had a taxable capital gain of $55 a share (minus commissions).