Step-Up Basis

Resetting an inherited asset's cost basis to its value at the owner's death, erasing prior gains for tax purposes.

When someone inherits an asset like stock or real estate, its cost basis, the number used to calculate capital gains tax, resets to the asset's fair market value on the date of death rather than what the original owner paid. This step-up basis can erase decades of unrealized gains, so heirs who sell shortly after inheriting often owe little or no capital gains tax.

Because of the step-up basis, she owed almost no capital gains tax when she sold the stock her father had bought decades earlier.