Step-Up In Basis

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DEFINITION of 'Step-Up In Basis'

The readjustment of the value of an appreciated asset for tax purposes upon inheritance. With a step-up in basis, the value of the asset is determined to be the higher market value of the asset at the time of inheritance, not the value at which the original party purchased the asset.

BREAKING DOWN 'Step-Up In Basis'

In most cases, when an asset is passed on to a beneficiary, its value is more than what it was when the original owner acquired it. The asset therefore receives a step-up in basis so that the beneficiary's capital gains tax is minimized - because it is not based on the increase in value from the original purchase price. For example, say your uncle purchased some shares at $2 in 1968 and he left them to you upon his death, at which time the shares are $15. For tax purposes, the shares would receive a step-up in basis, meaning your cost basis for the shares would become the current market price of $15. So, any capital gains tax you pay in the future will be based on the $15, not on the original purchase price of $2.

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