Part 1 — Direct Answer

A step-up in basis is a tax provision that resets the cost basis of an inherited asset to its fair market value on the date of the original owner's death. If your parent bought stock for $50,000 that was worth $300,000 at death, the heir's basis becomes $300,000 — not $50,000. If the heir then sells the stock for $300,000, there is no capital gain and no capital gains tax. The $250,000 of appreciation that occurred during the original owner's lifetime permanently escapes capital gains tax. The step-up in basis is one of the most powerful — and most misunderstood — estate planning provisions in the tax code.

Part 2 — Detailed Explanation

The step-up in basis applies to assets held in taxable accounts that pass through an estate at death. It does not apply to assets in IRAs, 401(k)s, or other tax-deferred retirement accounts — which pass to heirs as ordinary income when distributed. It does not apply to assets given away during the owner's lifetime — gifts carry over the donor's original basis (called "carryover basis"). The step-up is specifically tied to assets that pass at death through inheritance.

The types of assets that receive a step-up include individual stocks, mutual funds, ETFs, real estate, business interests, and other capital assets held in taxable accounts. For real estate, the step-up eliminates the built-in capital gain on property that has appreciated significantly — which for Arizona homeowners who purchased property decades ago can represent hundreds of thousands of dollars in untaxed appreciation.

The practical estate planning implications are significant. For appreciated assets in a taxable account that you don't need to sell during your lifetime, holding them until death rather than selling and reinvesting can result in substantial tax savings for your heirs. Conversely, assets that have declined in value should generally be sold before death — a loss that hasn't been harvested is permanently lost when the asset passes through the estate (the basis resets to the lower market value, eliminating the loss).

The interaction with IRAs and Roth accounts deserves careful attention. A traditional IRA passes to heirs as ordinary income — there is no step-up in basis, and every dollar withdrawn is fully taxable. A Roth IRA passes to heirs income-tax-free — not because of a step-up, but because Roth distributions are inherently tax-free. A taxable brokerage account with appreciated assets passes with a step-up, eliminating capital gains. Understanding which assets to hold, which to convert, and which to let pass through the estate is a coordinated decision that requires modeling across all three account types.

For Arizona retirees with significant real estate holdings, the step-up in basis on a primary residence that has appreciated substantially can be extremely valuable. Arizona property values have risen dramatically over the past decade. A home purchased for $300,000 now worth $750,000 has $450,000 of built-in gain. If sold during the owner's lifetime, the $250,000 per-person exclusion would shelter some of that gain but not all. If passed to heirs at death with a stepped-up basis, the entire gain up to the date of death escapes capital gains tax.

Part 3 — What This Means for You

If you have significant appreciated assets in a taxable brokerage account — particularly stocks, mutual funds, or real estate that have grown substantially — the step-up in basis is a reason to think carefully about your sequencing of sales and gifts. Assets you don't need to sell should generally be held until death to allow the step-up to eliminate the embedded capital gain for your heirs.

Charitable giving strategy also interacts with the step-up. Donating appreciated stock directly to a charity — rather than selling it and donating the proceeds — allows you to claim a deduction for the full fair market value while avoiding the capital gains tax on the appreciation. This produces better tax outcomes than selling the stock, paying capital gains tax, and then donating cash.

Part 4 — Common Mistakes and Misconceptions

• The most common mistake is gifting highly appreciated assets during your lifetime when you intend to leave them to heirs anyway. A gift carries over your original basis — the recipient takes on the embedded capital gain. Waiting to pass the asset at death through the estate allows the step-up to eliminate that gain permanently.
• The second mistake is not harvesting losses before death. Unrealized losses in a taxable account are permanently lost when the asset passes through the estate (basis steps up to current market value, eliminating the loss). Selling losing positions before death and using the losses to offset other gains is more tax-efficient than letting the losses disappear at death.
• The third mistake is assuming Roth accounts receive a step-up. They don't need one — Roth distributions are tax-free regardless. But this misconception leads some people to misunderstand why they should hold appreciated assets in taxable accounts rather than IRAs: the step-up only works on taxable accounts.