What is Stepped-Up Basis, and Who Gets It?
When someone dies owning appreciated assets, like real estate, stocks, or a business, the tax law gives heirs a powerful benefit: stepped-up basis.
What Is Stepped-Up Basis?
"Basis" is simply your starting point for figuring out gain or loss when you sell something. If you bought a house for $100,000, your basis is $100,000. If it's worth $400,000 when you sell, you have a $300,000 taxable gain.
At death, the rules change. The heir's basis is reset to fair market value on the date of death (or the alternate valuation date, if elected). Using that same house example, if Dad dies when it's worth $400,000, the heir's basis is $400,000. Sell it the next day for $400,000, and there's no gain at all. That's the "step-up."
Without step-up, that $300,000 gain could mean $45,000–$60,000 in federal long-term capital gains tax, plus state tax. Long-term federal capital gains are taxed at 0%, 15%, or 20% depending on your income level, with most taxpayers falling in the 15% bracket. If the asset was held less than a year, the gain could be taxed as ordinary income at rates up to 37%. And higher-income taxpayers may also owe the additional 3.8% net investment income tax (NIIT) on top of that.
Note: Certain assets, including retirement accounts and properry given away during life, don't receive a stepped-up basis. Those follow different tax rules.
Who Gets the Step-Up?
Here's the key point: all heirs get stepped-up basis, regardless of their relationship to the decedent.
- Child inheriting from a parent? Yes.
- Nephew inheriting from an uncle? Yes.
- Completely unrelated friend named in a will? Yes.
The step-up applies to anyone who takes inherited property under IRC Section 1014. It does not depend on family ties, marriage, or any other personal relationship.
Where People Get Confused: Inheritance Tax
Maryland is one of only a handful of states with an inheritance tax. This is different from estate tax, in that instead of taxing the estate as a whole, inheritance tax is levied on the transfer of assets to certain beneficiaries.
- Exempt relatives (spouses, children, grandchildren, parents, siblings, etc.) don't pay inheritance tax.
- Other heirs (nieces, nephews, cousins, unrelated friends) generally do pay the tax, often at 10%.
That's probably where the confusion comes from. Inheritance tax is a state transfer tax, completely separate from the federal (or state) income tax basis rules. Whether you pay inheritance tax in Maryland has nothing to do with whether you get a step-up in basis.
A Quick Word on Estate Tax
At the federal level, the estate tax is a separate system entirely, based on the size of the estate. In 2025, the federal exclusion is $13.99 million per person. Under the One Big Beautiful Bill Act of 2025 (OBBBA), that amount increases to $15 million per person beginning in 2026, with future inflation adjustments. The OBBBA also made this higher exemption permanent, rather than letting it drop back to pre-2018 levels. This means that very few estates will be taxable. And even when federal or state estate tax applies, heirs still get the step-up in basis.
Some states also have their own estate taxes, but most do not. Maryland is one of the few that does, with a $5 million exemption per person. And here's what makes Maryland unique: it is the only state in the country that imposes both an estate tax and an inheritance tax.
Legislative Proposals in Maryland (2025 Session)
Two big changes were floated this year:
- Abolishing the inheritance tax entirely. Proposed by the Governor, but not enacted.
- Lowering the estate tax exemption from $5 million to $2 million. Also proposed, but not enacted.
For now, both systems remain the same: $5 million estate tax exemption, and inheritance tax only for non-exempt heirs.
What About Proposals to Eliminate the Step-Up?
From time to time, Washington floats the idea of changing or even eliminating the step-up in basis. Most recently, President Biden proposed taxing unrealized gains at death. In other words, heirs would have to pay capital gains tax as if the assets were sold on the date of death, instead of receiving a step-up.
That proposal did not pass, and the current step-up rules remain in place. But it's a reminder that tax law can change. The step-up has been part of the Internal Revenue Code for decades, and for now it still applies across the board.
Key Takeaways to Remember
- Stepped-up basis is an income tax rule.
- All heirs get it, regardless of relationship.
- Inheritance tax rules in Maryland (and a few other states) are separate, and do depend on relationship.
- Estate taxes (state and federal) are also a different system, based on the size of the estate, not the heir's relationship.
- Recent proposals both in Maryland (estate and inheritance tax changes) and at the federal level (eliminating step-up) failed, so the current rules still apply. But these kinds of proposals resurface often, so staying up to date is critical for effective tax and estate planning.
So, if you're inheriting property, or intending to leave property to heirs, don't get confused. Step-up in basis is for everyone, inheritance tax depends on who you are, and estate tax only applies when total assets exceed the exemption limits.
Need help sorting all this out?
The tax rules around inheritance, step-up in basis, and estate planning can get complicated, and proposals keep surfacing that could change the landscape. If you want to understand how the current rules apply to your situation, and how to prepare for what's next, reach out.