What is step-up in basis and how does it work at death?

Step-up in basis resets the cost basis of inherited assets to their fair market value on the date the owner died. That can erase decades of capital gains for the heir. Suppose your father bought stock for $20,000 that's worth $200,000 when he dies; you inherit it with a basis of $200,000, so if you sell right away you owe essentially no capital gains tax. The same applies to a house, rental property, or taxable brokerage account. It's one of the most powerful – and underappreciated – features of the U.S. tax code for inherited wealth. Note that retirement accounts like traditional IRAs and 401(k)s do not get a step-up; those are still taxed as ordinary income to heirs. This is why holding highly appreciated assets until death is often more tax-efficient than gifting them during life.