Step-Up in Basis

A step-up in basis resets the tax basis of an inherited asset to its fair market value on the date of the owner’s death, or an alternate valuation date. Under Section 1014 of the Internal Revenue Code, appreciation that built up during the owner’s lifetime is generally not subject to capital gains tax for the heirs.

Key Points

• 1031 exchanges: Under current law, gain deferred through one or more 1031 exchanges is generally not taxed to heirs when the property passes at death, because the basis steps up to fair market value.
• Depreciation: The step-up also generally removes the depreciation recapture that would have applied if the original owner had sold.
• Not the QOF step-up: The 10% or 30% basis increase for Qualified Opportunity Fund investments is a separate rule with its own requirements.

To learn more, see how SREI Group approaches DST investments.