Stepped-Up Basis to be Replaced by Carry-Over Basis

When you purchase an asset, the purchase price becomes your tax basis for that property. If you later sell that asset, your tax basis is used to determine your capital gain or loss for tax purposes.

If you receive property by gift, you take the donor’s basis. For example, Mr. Smith purchases ABC stock for $10 a share. Mr. Smith’s basis is $10 a share and if he sells the stock, his gain or loss would be based upon his $10 tax basis. Mr. Smith, instead of selling his ABC stock, gives his son the stock. His son’s basis is also $10 per share. This is sometimes called a “carry-over” basis, because Mr. Smith’s tax basis carries over to his son.

One benefit of inheriting property from a decedent is receiving a “stepped-up” basis. Pursuant to Internal Revenue Code (IRC) §1014, the basis of property inherited from a decedent is generally the fair market value of the property at the decedent's death, as opposed to the decedent’s cost to acquire the property. For example, Mr. Smith leaves his ABC stock to his son in his will. At the time Mr. Smith passes away, the value of the stock is $25 per share. Although Mr. Smith’s basis was $10, his son’s basis is stepped up to $25.

The benefit of the “stepped-up” basis will not be with us much longer, barring a legislative change. This is because the “stepped-up” basis under IRC §1022 will not apply to decedents’ estates with a date of death after December 31, 2009. Instead, IRC §1022 provides that the property acquired from a decedent shall be treated as transferred by gift. Therefore, when an heir sells the asset, he will be responsible for paying capital gains tax on all the gains that had accrued since the decedent originally acquired the asset.