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Introduction: What is a Step Up in Basis?

If you have recently inherited property or other valuable assets in Texas, you may have heard the term step up in basis. But what is a step up in basis, and why does it matter for heirs and beneficiaries?

This tax concept plays a crucial role in determining how much capital gains tax you may owe if you sell inherited property. For families in Sugar Land and across Texas, understanding what is a step up in basis can help minimize tax burdens and preserve wealth across generations.

At The Lange Firm, directed by Evan Lange, we work with families navigating probate, estate administration, and inheritance-related matters. This blog will explain what is a step up in basis, how it applies in Texas, and what heirs should know when inheriting assets.

What is a Step Up in Basis and Why Does It Matter?

Defining the Step Up in Basis Rule

In simple terms, a step up in basis refers to the adjustment of the tax basis of an inherited asset to its fair market value (FMV) at the time of the original owner’s death.

This means that if you inherit property that appreciated in value during the deceased’s lifetime, the asset’s basis is “stepped up” to its current market value—effectively erasing any capital gain that accumulated while the deceased owned the asset.

This is important because capital gains tax is calculated based on the difference between the sale price and the asset’s basis. With a higher stepped-up basis, heirs may owe significantly less in taxes when they sell the property.

What is a Step Up in Basis for Real Estate?

Inheriting Homes, Land, and Rental Properties

Real estate is one of the most common assets subject to the step up in basis rule. When a parent or spouse passes away and leaves a home or investment property to an heir, the property’s tax basis is adjusted to its market value at the time of death.

For example:

• If a home was purchased for $150,000 decades ago, but it’s worth $500,000 at the time of death, the new basis becomes $500,000.
• If the heir sells the home for $510,000, capital gains tax would only apply to the $10,000 gain—not the $360,000 gain that occurred during the original owner’s lifetime.

This favorable tax treatment is one reason families often ask: what is a step up in basis when planning for inheritance.

What is a Step Up in Basis for Stocks and Investments?

Financial Portfolios and Inherited Wealth

The step up in basis applies to more than just real estate—it also applies to stocks, mutual funds, and other investments.

If an heir inherits shares of stock that appreciated significantly during the original owner’s life, the basis is adjusted to the stock’s market value at the date of death. This can save heirs a substantial amount in capital gains tax if they choose to sell the inherited stock.

What is a Step Up in Basis in Texas Probate?

Step Up in Basis and Estate Administration

In Texas, the step up in basis applies automatically to inherited assets as part of the estate settlement process. Whether probate is required or the estate passes through simplified procedures, inherited assets receive a step up in basis under federal tax law.

This makes understanding what is a step up in basis especially important for executors and beneficiaries involved in Texas probate cases.

What is a Step Up in Basis for Jointly Owned Property?

Community Property and Spousal Inheritance

Texas is a community property state, which can further enhance the benefits of the step up in basis when one spouse dies.

In Texas, if a married couple owned property together as community property, both spouses’ halves receive a step up in basis at the first spouse’s death. This “double step up in basis” can dramatically reduce capital gains taxes when the surviving spouse sells the property.

What is a Step Up in Basis for Business Assets?

Family Businesses and Inherited Ownership

If heirs inherit business interests—such as shares in a family corporation, membership in an LLC, or partnership interests—these assets also receive a step up in basis.

This can make it easier for heirs to restructure, sell, or continue operating the business after the original owner’s death without facing immediate capital gains tax burdens.

What is a Step Up in Basis for Personal Property?

Valuable Collectibles and Tangible Assets

While many people associate basis adjustments with real estate or stocks, the step up in basis also applies to valuable personal property like:

• Artwork
• Jewelry
• Antiques
• Vehicles

If these items appreciate over time, heirs receive them with a stepped-up basis, reducing potential tax liability if they are later sold.

What is a Step Up in Basis for Retirement Accounts?

Exceptions to the Rule

It’s important to note that IRAs, 401(k)s, and other tax-deferred retirement accounts do not receive a step up in basis. Instead, heirs who inherit these accounts must pay income tax on withdrawals, following required minimum distribution (RMD) rules if applicable.

What is a Step Up in Basis and How is It Calculated?

Determining Fair Market Value

The key to correctly applying the step up in basis is accurately determining the asset’s fair market value at the time of death. This can involve:

• Real estate appraisals
• Broker price opinions for investment properties
• Valuations for business interests
• Statements showing stock prices on the date of death

Having clear documentation is crucial, especially if the asset is sold later and the IRS questions the reported basis.

What is a Step Up in Basis for Out-of-State Property?

Assets Located Outside Texas

The step up in basis applies to all inherited assets, regardless of their location, as long as they pass to heirs upon death. Texas heirs inheriting property in other states (or vice versa) benefit from this tax rule just as if the property were located in Texas.

What is a Step Up in Basis and Why Does It Benefit Families?

Tax Savings and Wealth Preservation

Ultimately, the step up in basis is one of the most valuable tax benefits available to heirs. It can reduce or eliminate capital gains tax liability, allowing families to preserve more wealth across generations.

This is especially important for Texas families with significant real estate holdings, long-held investments, or closely held businesses.

Conclusion

For families in Sugar Land and across Texas, understanding what is a step up in basis can have a profound impact on estate planning, inheritance, and tax liability.

At The Lange Firm, directed by Evan Lange, we help families navigate the complexities of Texas probate and estate administration, ensuring that heirs understand the financial and tax implications of inheritance. While this blog does not provide specific legal advice, it serves as a helpful guide for families preparing to settle estates and manage inherited assets.