<P> Under Internal Revenue Code § 1014 (a), when a person (the beneficiary) receives an asset from a giver (the benefactor) after the benefactor dies, the asset often receives a stepped - up basis, which is its market value at the time the benefactor dies . A stepped - up basis is often much higher than the before - death cost basis, which is primarily the benefactor's purchase price for the asset . Because taxable capital - gain income is the selling price minus the basis, a high stepped - up basis can greatly reduce the beneficiary's taxable capital - gain income when the beneficiary sells the inherited asset . </P> <P> Under IRC § 1014 (a), which applies to an asset that a person (the beneficiary) receives from a giver (the benefactor) after the benefactor dies, the general rule is that the beneficiary's basis equals the fair market value of the asset at the time the benefactor dies . This can result in a stepped - up basis or a stepped - down basis . An example of a stepped - up basis: If Benefactor owned a home that Benefactor purchased for $35,000, then Benefactor's basis in the home would be equal to its purchase price, $35,000, assuming no adjustments under IRC § 1016, which allows for increases in basis such as home improvements, or decreases in basis such as unrepaired windstorm damage . Continuing the example, the fair market value of Benefactor's home was $100,000 on the day Benefactor died . After Beneficiary inherits the home from Benefactor, Beneficiary's basis in the home is that fair market value, $100,000 . In contrast, if Benefactor gives the home to Beneficiary before Benefactor dies, then Beneficiary receives a carryover basis, which is equal to the Beneficiary's purchase price for the home, $35,000, again assuming no adjustments under IRC § 1016 . </P>

When do you get a step up in cost basis