Inherited assets receive a cost-basis reset to date-of-death value, eliminating capital gains tax liability for heirs upon sale.
A daughter inherited an $800,000 taxable portfolio and sold all holdings the following month, incurring no capital gains tax due to IRS Section 1014. The rule resets the cost basis to the asset’s fair market value at the time of the original owner’s death, erasing decades of built-up gains.
The step-up applies only to taxable accounts like stocks, ETFs, and real estate. Retirement accounts such as IRAs and 401(k)s remain subject to ordinary income tax on withdrawals. If the portfolio’s value declined before inheritance, the basis steps down, eliminating potential loss deductions for heirs.
The provision aims to simplify tax treatment for inherited assets but does not extend to all account types, creating disparities in tax liability.