Your parents bought shares of a local company decades ago for a few thousand dollars.
Today they’re worth $300,000. If they had sold before they died, they’d have owed capital gains tax on nearly all of it. Because you inherited the shares instead, your tax basis is generally their value on the date of death. Sell them next month for about that value and there may be little or no tax at all.
How the step-up works
| If sold before death | If inherited, then sold | |
|---|---|---|
| Original cost | $5,000 | $5,000 |
| Value | $300,000 | $300,000 at death |
| Tax basis | $5,000 | $300,000 |
| Taxable gain on a $300,000 sale | $295,000 | About $0 |
Any growth after the date of death is taxable when you sell, and it’s treated as long-term no matter how soon you sell. If the estate files an estate tax return, the executor can sometimes value everything six months after death instead. That’s allowed only when it lowers both the estate and the tax.
What gets a step-up, and what doesn’t
| Asset | Step-up? |
|---|---|
| Stocks, bonds, mutual funds, ETFs in a taxable account | Yes |
| Real estate, including the family home | Yes |
| A business interest | Yes, generally, with a valuation |
| Traditional IRAs, 401(k)s, annuities | No. Withdrawals are taxed as income. |
| Assets given away during life | No. The recipient keeps the giver’s original basis. |
That last line is why timing matters. Giving highly appreciated stock to children during life passes along the old, low basis. Leaving it to them at death passes a stepped-up one. For families below estate tax thresholds, that difference can be worth more than the gift.
Joint property in New York
New York isn’t a community property state. When spouses own investments or a home jointly, generally only the deceased spouse’s half gets a step-up.
The survivor’s half keeps its original basis. Property owned only by the spouse who died gets a full step-up. It’s one reason couples with large unrealized gains sometimes review how assets are titled.
When to sell inherited stock
- Selling soon after inheriting often means little tax, which makes it a good time to diversify.
- If one stock is a large share of what you inherited, the step-up is a rare chance to reduce that risk cheaply.
- Keeping a stock out of loyalty is a valid choice. Make it on purpose, not by default.
- Coordinate with the estate’s cash needs before anything is sold.
Keep the records
- Get date-of-death values for every holding, from the custodian or a valuation service.
- Check that the new account shows the stepped-up basis. If not, have it corrected before you sell.
- Keep the estate’s valuation records with your tax files. You may need them years later.
How Morrowgate helps. Greg gathers the date-of-death values, makes sure the inherited accounts carry the right basis, and builds a plan to diversify or keep each holding with your CPA. Accounts are titled correctly and held in your name at Fidelity, with Schwab available.
Questions heirs ask
Do I pay capital gains tax on inherited stock?
Only on the gain above its value at the date of death, and that gain is long-term. Selling soon after inheriting often produces little tax.
Do inherited IRAs get a step-up in basis?
No. Withdrawals from inherited traditional IRAs and 401(k)s are taxed as ordinary income.
Does a surviving spouse get a full step-up in New York?
Generally only on the half owned by the spouse who died, for jointly held property. Property owned solely by that spouse gets a full step-up.
What if my brokerage shows the old cost basis?
Provide the date-of-death values and ask them to update it. Otherwise your 1099 may overstate the gain.
Where this guidance stops
This article is general education on the step-up in basis for inherited property: how the rules and the options generally work.
It is not tax, legal or investment advice, and nothing here is a recommendation for your situation. Rules change and outcomes turn on the facts, which is why a CPA and an attorney look at a family’s own numbers before anything is done.
Sources
- IRS Publication 551: Basis of assets (inherited property)
- IRS: Gifts and inheritances
- 26 U.S.C. § 1014: Basis of property acquired from a decedent