Your dad invests $100,000 in an S&P 500 index fund. Twenty years later, it’s worth $500,000.
If he sells, he has a $400,000 capital gain. Applying a 15% or 20% federal long-term capital gains rate would produce a $60,000 or $80,000 tax bill, before any additional taxes. His actual bill depends on his income, filing status, and other tax details. IRS capital gains tax rules
If he holds the investment until he dies and you inherit it, your tax basis generally resets to its market value at his death. If that value is $500,000 and you sell for $500,000, you generally have no capital gain.
That’s called a step-up in basis. It can eliminate the federal capital gains tax on appreciation that happened during the previous owner’s lifetime. IRS inherited property rules
It also helps explain why an investor might refuse to sell a property they’ve owned for decades.
What is a step-up in basis?
Your basis is the amount you use to calculate a taxable gain or loss. For an investment you purchase, it usually starts with what you paid, then changes for applicable adjustments.
For inherited property, the basis generally becomes the fair market value on the date the owner died. Certain estates can use an alternate valuation date under specific rules.
When the inherited value exceeds the previous owner’s adjusted basis, the increase is commonly called a step-up in basis. If the asset has fallen in value, the same rule can produce a step-down. IRS Publication 551
A $500,000 inherited stock example
Let’s compare your dad selling the investment with you inheriting it.
Assume his adjusted basis remains $100,000, the shares are worth $500,000 at his death, and you sell at that same value. We’re leaving out transaction costs and any basis changes from additional purchases or reinvested dividends.
| Your dad sells during his lifetime | You inherit and sell | |
|---|---|---|
| Sale price | $500,000 | $500,000 |
| Tax basis | $100,000 | $500,000 |
| Capital gain | $400,000 | $0 |
The inherited basis replaces his old basis for calculating your gain. If you instead hold the shares and later sell for $550,000, you generally have a $50,000 gain, before other adjustments. The appreciation after his death can still be taxable. IRS guidance for beneficiaries
The original $60,000–$80,000 estimate needs some context. Federal long-term capital gains rates are generally 0%, 15%, or 20%, and portions of a gain can fall into different brackets. You cannot determine the exact tax from the gain alone. IRS capital gains tax rules
Higher-income taxpayers may also owe the 3.8% net investment income tax. It applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds the applicable threshold. IRS net investment income tax guidance
So “the IRS gets $0” can accurately describe the capital gains tax in the inheritance example. It does not mean every tax connected to the investment or estate disappears.
Why some real estate owners hold property until death
I personally know a guy in his 80s with a big real estate portfolio. He told me:
“I’m not going to sell because I will have to pay a lot of taxes. I will just leave it all to my son so he can sell it.”
His reasoning makes sense from a capital gains tax perspective.
Qualifying inherited real estate generally receives the same basis reset. That can apply to a house, rental property, or land. If his son inherits the property and sells it for its inherited basis, there may be little or no taxable gain after accounting for selling expenses and other adjustments. IRS guidance on inherited property
Rental properties can have an additional complication during the owner’s lifetime. Depreciation reduces adjusted basis, potentially increasing the gain on a sale. Some gain attributable to depreciation on real property can face a maximum federal rate of 25%. IRS basis adjustments, IRS capital gains tax rules
For someone who wants to leave the properties to a child and does not need the sale proceeds, a potential basis adjustment is a substantial reason to keep them.
But the tax bill alone does not prove that holding every property is the best decision.
Why “never sell” goes too far
An owner may need cash for living expenses, want fewer properties to manage, or have too much money tied up in one investment. Repairs, vacancies, debt payments, and a falling property value can outweigh potential tax savings.
A personal residence also has its own tax break. Eligible homeowners can exclude up to $250,000 of gain, or up to $500,000 for qualifying married couples filing jointly. Ownership, use, and other requirements apply. Someone may already be able to sell their home with little or no federal capital gains tax during their lifetime. IRS home sale exclusion rules
For the man with the real estate portfolio, holding may fit his finances and his plans for his son. Another owner may be better off selling, paying the tax, and using the money.
Gifting assets during life can produce a different tax result
Giving your child appreciated stock while you’re alive generally does not produce the same basis reset as leaving it to them at death.
For calculating a gain, the child generally takes your adjusted basis, subject to applicable adjustments. Gifted property has additional rules when its value is below the donor’s basis.
In the stock example, gifting the $500,000 investment during life could leave your child with a $100,000 basis and a substantial taxable gain when they sell. IRS rules for gifted property
Before transferring a deed or gifting shares, compare the income tax consequences of a lifetime gift with those of an inheritance.
Retirement accounts, trusts, and estate taxes need separate attention
The brokerage account detail matters. An inherited traditional IRA does not get the same treatment as stocks held in a taxable brokerage account. Distributions are generally taxable, except for amounts attributable to nondeductible contributions or another applicable exception. IRS inherited IRA rules
Putting assets in a trust also does not automatically guarantee a step-up. The IRS has confirmed that assets in an irrevocable grantor trust generally do not receive the adjustment when they are outside the deceased owner’s gross estate under the circumstances addressed in its ruling. IRS Revenue Ruling 2023-2
Federal estate tax is a separate calculation. For a U.S. citizen or resident dying in 2026, the basic exclusion amount is $15 million. Prior taxable gifts and other estate details affect that calculation. A basis adjustment can apply even when no federal estate tax is owed. IRS estate tax guidance, IRS inherited property rules
Before deciding to sell, gift, or leave an asset to your children, have your tax adviser and estate planning attorney review the current basis, expected sale proceeds, ownership structure, and applicable state taxes. If you’ve already inherited property, keep the valuation records that support your inherited basis before you sell.
If you have inherited stocks or real estate — or you are deciding whether to sell, gift, or hold — OHR Tax Group’s CPAs and Enrolled Agents can review the basis and the tax result before you move. Columbus-based, English and Mandarin, by appointment or Zoom. Contact OHR Tax Group.