A step-up in basis is the readjusted value of an asset inherited by a beneficiary. The readjusted value is referred to as “stepped-up” because the asset’s base value is increased to reflect the value of the asset at the date of the decedent’s death. This adjustment creates a huge tax advantage for the beneficiary because, if the asset is ever sold, the capital gains taxes due upon the sale of an inherited asset are reduced.
For example, let’s say you purchased your home for $100,000. Your “basis” in the house is $100,000. Upon your death, you leave the home to your daughter and it is now worth $150,000. Her basis in the house is $150,000 not $100,000. Should your daughter decide to sell it for $150,000, she would not recognize a “gain” because the sales price ($150,000) minus the value ($150,000) is zero. Should she sell it for $170,000 she would only pay capital gains taxes on $20,000 ($170,000 minus $150,000) rather than $70,000 ($170,000 minus $100,000).
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