She Inherited Her Mother’s $800,000 Portfolio and Sold Everything the Next Month. Total Tax Bill: $0

If you’ve ever inherited a taxable brokerage account, mutual funds, or individual stocks from a parent, there is a rule inside the tax code that can erase decades of capital gains overnight. It’s called the step-up in basis, and it’s the reason a daughter can inherit an $800,000 portfolio her mother built from a $50,000 seed in the 1980s, sell every share the next month, and owe the IRS nothing on the gain.

The Rule That Resets the Clock

When someone dies and leaves you appreciated assets held in a regular taxable account, your cost basis in those assets resets to the fair market value on the date of death, regardless of what the deceased originally paid. Every dollar of unrealized gain that built up during your mother’s lifetime simply vanishes for tax purposes. If she paid $50,000 for a stock portfolio worth $800,000 the day she died, your basis is $800,000. Sell it the following week at $800,000 and your taxable gain is zero.

Where This Lives in the Code

The authority is Internal Revenue Code Section 1014, titled “Basis of property acquired from a decedent.” It states that the basis of property in the hands of a person acquiring it from a decedent is the fair market value at the date of the decedent’s death. An alternate valuation date, six months after death, is available under IRC Section 2032 when the executor elects it for the estate. This is black-letter tax law that has existed for decades, and it has survived repeated legislative challenges.

Who Actually Gets This Break

The step-up applies to capital assets passing through an estate: individual stocks, ETFs, mutual funds, bonds, real estate, and collectibles held in taxable accounts. It applies whether you inherit through a will, a revocable trust, or as a transfer-on-death beneficiary on a brokerage account.

The rule does not cover assets inside traditional IRAs, 401(k)s, 403(b)s, or annuities. Those are “income in respect of a decedent,” and you pay ordinary income tax on withdrawals just like the original owner would have. The step-up also does not apply to assets your parent gave you while still alive. Lifetime gifts carry over the original basis, which is why gifting appreciated stock before death often costs the family far more in tax than simply letting it pass at death. Worth knowing: IRC Section 1014(e) also specifically denies the step-up for appreciated property that a decedent received as a gift from the heir within one year before death and then left back to that same heir.

How to Actually Claim It

1. Get the date-of-death fair market value for every position. For publicly traded securities, use the average of the high and low trading prices on the date of death. Most brokerages will produce a “date-of-death valuation” statement on request.
2. Open an inherited account at the same brokerage and have the assets transferred in kind. Do not sell inside the decedent’s account.
3. Instruct the brokerage to update the cost basis on every lot to the stepped-up value. This is the step people miss. Custodians don’t always do it automatically, and if the 1099-B later shows the original basis, you’ll receive a tax bill you never owed.
4. When you sell, confirm the 1099-B reports the new basis. Any small gain or loss from the sale date will be treated as long-term regardless of how long you’ve owned it, per IRC Section 1223(9).

The Catches Nobody Mentions

The step-up works both ways. If your mother’s portfolio had dropped from $800,000 to $500,000 by the date of death, your basis steps down to $500,000 and the built-in loss disappears permanently. When a decedent holds significant losers, selling before death to lock in the deduction is often the smarter move.

The second trap is retirement accounts. A $500,000 inherited IRA is treated very differently from a $500,000 inherited brokerage account, though heirs routinely assume otherwise. Under the SECURE Act, most non-spouse beneficiaries must drain an inherited IRA within 10 years, paying ordinary income tax on every dollar the whole way down.

The third catch involves geography. The nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) give a surviving spouse a full step-up on both halves of jointly held assets under IRC Section 1014(b)(6). In common-law states, only the deceased spouse’s half steps up. Same marriage, same portfolio, wildly different tax outcome depending on your ZIP code.

Finally, estates above the federal exemption still face estate tax before assets ever reach you. For 2026, that exemption is $15 million per individual (up from $13.99 million in 2025), after the One Big Beautiful Bill Act made the higher threshold permanent and indexed it for future inflation. A married couple can now shield up to $30 million from federal estate tax. For the vast majority of families, though, the step-up is a quiet, complete, and perfectly legal wipe of a lifetime of capital gains.

Editor’s note: This article was updated to name all nine community property states explicitly, to add the 2026 federal estate tax exemption of $15 million per individual (raised from $13.99 million in 2025 under the One Big Beautiful Bill Act), and to include the IRC Section 1014(e) one-year lookback rule on gifts returned to a decedent.

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