Q: Why should I never gift a loss asset?

If you gift an asset with a built-in loss (original basis > current FMV), the step-down rule means the recipient cannot use that loss either. You should sell the asset first, take the loss on your own return, and then gift the cash proceeds. Gifting a loss asset wastes the tax loss permanently.

Question 1

What is a step-up in basis at death?

Accepted Answer

Under IRC §1014, when a beneficiary inherits an asset, the cost basis of that asset is 'stepped up' to its fair market value on the date of death (or alternate valuation date). This erases all embedded capital gains the deceased had. If the beneficiary sells the inherited asset immediately, they owe zero capital gains tax. Source: IRS Publication 551.

Question 2

What is a step-down in basis at gift?

Accepted Answer

Under IRC §1015, when you give an asset as a gift, the recipient inherits your original (carryover) basis — not the current fair market value. If you have a loss (FMV < basis), the recipient's basis for loss purposes is the FMV at date of gift (the 'step-down'). There is no step-up for gifted assets.

Question 3

Why should I never gift a loss asset?

Accepted Answer

If you gift an asset with a built-in loss (original basis > current FMV), the step-down rule means the recipient cannot use that loss either. You should sell the asset first, take the loss on your own return, and then gift the cash proceeds. Gifting a loss asset wastes the tax loss permanently.

Question 4

Does a step-up in basis apply to community property?

Accepted Answer

Yes — in community property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), both halves of community property assets can receive a step-up to FMV at the first spouse's death, not just the deceased spouse's half. This is a significant advantage over jointly-held property in common law states.

Question 5

How does gifting affect the giver's estate tax?

Accepted Answer

Gifts reduce your taxable estate by removing the asset from your estate. However, gifts above the annual exclusion ($18,000 per recipient in 2026) reduce your lifetime gift/estate tax exemption (currently $13.99 million in 2026, set to drop to ~$7M after 2025 TCJA sunset unless extended). Gifting appreciated assets may save estate tax but sacrifices the step-up in basis benefit for the recipient.

Question 6

What is the alternate valuation date for inherited assets?

Accepted Answer

If the estate elects the alternate valuation date (6 months after death), assets are valued at that later date instead of date of death. This election can only be made if it reduces both the gross estate and estate tax — and must be applied consistently to all assets. Source: IRC §2032.

Question 7

Can I use a trust to get a step-up in basis and avoid estate tax?

Accepted Answer

Certain trust structures (like a spousal lifetime access trust or a grantor retained annuity trust) can be used to manage estate tax exposure while preserving step-up benefits. However, irrevocable trusts remove the asset from your estate and may affect basis rules. Always consult an estate attorney for trust strategy.

Question 8

Does the step-up apply to retirement accounts like IRAs?

Accepted Answer

No. Assets in traditional IRAs, 401(k)s, and similar tax-deferred accounts do NOT receive a step-up in basis at death. Beneficiaries inherit these accounts as income in respect of a decedent (IRD) and must pay ordinary income tax on all withdrawals. Source: IRC §691.

Question 9

What is 'carryover basis' in a gift?

Accepted Answer

Carryover basis means the recipient of a gift takes on the donor's original cost basis plus any gift tax paid on appreciation (under IRC §1015(d)). If you paid $10,000 for stock now worth $80,000 and gift it, the recipient's basis is $10,000 — they owe capital gains tax on $70,000 when they sell.

Question 10

Is a step-up in basis the same as a stepped-up valuation?

Accepted Answer

Yes, 'step-up in basis' and 'stepped-up basis' refer to the same IRC §1014 rule that resets an inherited asset's cost basis to its fair market value at the decedent's date of death, eliminating embedded capital gains tax liability for the heir.

Question 11

What assets do NOT qualify for step-up in basis?

Accepted Answer

Income in respect of a decedent (IRD) — such as traditional IRA/401k balances, unpaid wages, and installment sale receivables — does not qualify for step-up in basis. ROTH IRAs also do not get a step-up (though gains are already tax-free). Source: IRC §1014(c).

Factor	Gift Now (IRC §1015)	Inherit at Death (IRC §1014)
Recipient's basis	Carryover (your original basis)	Step-up to FMV at date of death
Embedded gains	Transferred to recipient	Permanently eliminated
Estate tax impact	Reduces taxable estate	Asset included in estate
Annual exclusion	$18,000 per donor per recipient (2026)	N/A
Best for	Loss assets; reducing large estates	Appreciated assets; heirs who will sell

Step-Down vs Step-Up Basis Calculator

Step-Up vs Step-Down Basis Explained

Gift vs Inheritance: Side-by-Side Comparison

Strategic Planning Considerations