Step-up in basis is a tax provision that resets an inherited asset's cost basis to its fair market value as of the original owner's date of death, rather than carrying forward the basis the decedent originally paid. For real estate held until death, this means any appreciation and depreciation recapture that accrued during the owner's lifetime is effectively eliminated for tax purposes, and heirs who later sell the property owe capital gains tax only on appreciation occurring after they inherited it.
This mechanism is a key reason some long-term real estate investors favor a hold-until-death strategy, sometimes paired with lifetime use of tax deferral tools, rather than selling and recognizing gain during their lifetime. Investors who repeatedly defer gains through a chain of 1031 exchanges across decades sometimes plan for a final step-up in basis to pass appreciated property to heirs without the deferred tax liability ever coming due. Because estate and basis rules can change with legislation, this strategy should be reviewed with a tax advisor rather than assumed permanent.
Further reading: Understanding 1031 Exchanges: A Guide for Accredited Real Estate Investors
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