What Does Step-Up Basis Mean?

By Robin Hartill, CFP – Updated Jun 10, 2025 at 2:41 AM EST

Key Points

Inheriting an asset grants a step-up in basis, setting cost basis to FMV at death, reducing capital gains tax.
Controversy surrounds step-up in basis, as it significantly lowers taxes on inherited wealth.
Step-up in basis doesn't apply to gifts during life, preserving the original cost basis for recipients.

When you inherit an asset, you receive what’s called a step-up in basis. A step-up in basis adjusts the original cost basis to the asset’s fair market value (FMV) at the time of the original owner’s death, which can result in major tax savings if you’re the heir. Keep reading to learn what a step-up in basis is and when you might receive one.

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Fair Market Value (FMV)

An objective assessment of an asset's worth in a competitive and open market, reflecting willing buyer-seller dynamics.

For example, suppose your grandmother paid $50,000 for a beachfront condo in the 1980s. You inherit the condo when she dies. By that point, it has a fair market value of $500,000. If you sold the condo for $500,000, you wouldn’t owe capital gains taxes, even though you’re now $500,000 richer. Or suppose you hold onto the condo and then sell it for $525,000. You’d only owe taxes on $25,000 ($525,000-$500,000). As you can see, a step-up in basis can produce a serious tax break if you inherit assets that substantially appreciated before the owner’s death.

Note that a step up in basis doesn’t apply to gifts made during the donor’s lifetime. If your grandmother gifted you that condo she paid $50,000 for when she was still alive, your cost basis would be $50,000.

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About the Author

Robin Hartill, CFP, is a contributing writer at The Motley Fool. Robin’s work has also been published by Yahoo Finance, USA Today, and Penny Hoarder. She is a graduate of the University of Florida.

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Robin Hartill has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.