Step-Down vs Step-Up Basis Calculator
Compare the capital gains tax impact of gifting an asset now (carryover/step-down basis under IRC §1015) versus passing it at death (step-up in basis under IRC §1014). Instant, private estate planning analysis.
Step-Up vs Step-Down Basis Explained
The step-up in basis rule (IRC §1014) is one of the most powerful estate planning tools in the U.S. tax code. When a beneficiary inherits an asset, their cost basis is automatically reset to the asset's fair market value on the decedent's date of death. All embedded capital gains that accumulated during the owner's lifetime are permanently eliminated — no capital gains tax is ever owed on that appreciation. If the beneficiary sells immediately after inheriting, they owe zero federal capital gains tax.
The step-down rule works in the opposite direction for gifts. Under IRC §1015, when you gift an asset, the recipient inherits your original (carryover) basis. If your basis is $50,000 and the asset is now worth $300,000, the recipient has a $250,000 embedded gain they will eventually owe tax on. If the asset is worth less than your basis (a "loss asset"), the recipient's basis for calculating a loss is stepped down to the current FMV — the loss disappears. Source: IRS Publication 551, IRC §§1014 and 1015. Last updated: May 2026.
Gift vs Inheritance: Side-by-Side Comparison
| 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 |
Strategic Planning Considerations
The fundamental rule: never gift a highly appreciated asset to someone who will sell it soon. The step-up in basis at death eliminates the capital gains tax entirely — gifting the same asset forces the recipient to pay capital gains on all your accumulated appreciation. Exception: if your estate is large enough to trigger estate tax (above $13.99M per person in 2026, likely dropping to ~$7M after TCJA sunset), gifting may reduce estate tax exposure more than it costs in capital gains tax for the recipient. This is a math problem that must be solved case by case. Community property states offer an additional advantage: both halves of community property can receive a step-up to FMV at the first spouse's death (IRC §1014(b)(6)). Always consult a qualified estate attorney and CPA before making irrevocable transfer decisions.
Frequently Asked Questions
What is a step-up in basis at death?
Under IRC §1014, when a beneficiary inherits an asset, the cost basis is 'stepped up' to its fair market value on the date of death. This erases all embedded capital gains. If the beneficiary sells immediately, they owe zero capital gains tax. Source: IRS Publication 551.
What is a step-down in basis at gift?
Under IRC §1015, when you give an asset as a gift, the recipient inherits your original (carryover) basis. If the asset is worth less than your basis, the recipient's loss basis is stepped down to FMV at gift date — the built-in loss is permanently lost.
Why should I never gift a loss asset?
Gifting a loss asset wastes the tax loss permanently. You should sell the asset first, claim the loss on your own return, then gift the cash. The recipient cannot use the built-in loss on a gifted loss asset.
Does a step-up in basis apply to community property?
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.
How does gifting affect the giver's estate tax?
Gifts reduce your taxable estate by removing the asset. However, gifts above the annual exclusion ($18,000 per recipient in 2026) reduce your lifetime gift/estate tax exemption ($13.99M in 2026). Gifting appreciating assets may save estate tax but costs the recipient capital gains tax.
Does the step-up apply to retirement accounts like IRAs?
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 as income in respect of a decedent (IRD) and pay ordinary income tax on all withdrawals. Source: IRC §691.