What Is a Step-Up in Basis?
A step-up in basis is a powerful tax rule that adjusts the cost basis of an inherited asset — such as a home, rental property, or investment — to its fair market value (FMV) at the time of the original owner’s death.
In simple terms, it reduces or eliminates capital gains taxes when the heir sells the property.
Example: How It Works
Let’s say your grandmother bought a Brooklyn brownstone in the 1980s for $100,000.
When she passes, the property is worth $1 million.
If you inherit the home, your new cost basis becomes $1 million, not $100,000.
If you sell it soon after for $1.05 million, your taxable gain is only $50,000, not $950,000.
That’s the step-up in basis — a major tax benefit for inherited property owners.
Why It Matters for Real Estate Investors
For families and investors with property in New York, the step-up in basis can preserve significant wealth.
Without this rule, heirs would face massive capital gains taxes on decades of appreciation. With it, they can:
- Sell inherited property with minimal tax burden
- Reset depreciation schedules on investment properties
- Reinvest proceeds into other assets or perform a 1031 exchange for further tax deferral
Step-Up Basis vs. Original Cost Basis
| Term | Definition | Example |
|---|---|---|
| Original Basis | The purchase price of a property plus improvements | Grandma’s $100,000 purchase price |
| Stepped-Up Basis | Adjusted to the fair market value at the date of death | $1,000,000 (current market value) |
| Capital Gain | Sale price minus basis | $1,050,000 – $1,000,000 = $50,000 taxable gain |
How It Affects Depreciation
For rental and investment properties, the stepped-up basis also affects depreciation.
Depreciation can be restarted based on the new stepped-up value — giving heirs fresh tax deductions on a higher property value.
For example, if an inherited duplex’s new basis is $900,000 (excluding land), that amount can be depreciated over 27.5 years, generating substantial annual deductions.
Federal and New York Estate Tax Considerations
While the step-up in basis applies to federal taxes, New York State has its own estate tax rules to be aware of.
As of 2025, the NYS estate tax threshold is approximately $6.94 million. Estates above that may owe state-level taxes even if no federal estate tax applies.
Still, the step-up in basis reduces future capital gains for heirs — separate from any estate tax that might be owed by the estate itself.
When the Step-Up Doesn’t Apply
- Property gifted before death (not inherited) keeps the original cost basis.
- Assets held in certain trusts may not qualify depending on structure.
- If a property is co-owned, only the deceased owner’s portion receives a step-up.
Because these rules can be complex, consulting a tax professional or estate attorney is essential for proper planning.
Estate Planning Tip
For many property owners in NYC, holding assets until death — rather than gifting them early — can provide the maximum tax benefit to heirs through a stepped-up basis.
Combining this with strategies like 1031 exchanges, cost segregation, and trust planning can significantly preserve multigenerational wealth.
Final Thoughts
The step-up in basis is one of the most valuable yet misunderstood tools in real estate and estate planning.
By resetting the cost basis of inherited property to current market value, it shields heirs from major tax burdens and helps maintain family assets.
If you own real estate in New York, it’s wise to plan ahead with an estate professional — to ensure your loved ones inherit not only your property but also the financial peace that comes with a smart tax strategy.