Americans Hold Trillions in Unrealized Stock and Real Estate Gains, and Most of It Will Never Be Taxed. The 1921 Rule That Wipes the Slate Clean at Death
A 105-year-old tax rule can erase decades of investment gains the moment someone dies, and most Americans have no idea it applies to nearly everything they own.
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Consider an 81-year-old widow holding $640,000 of stock she bought for $40,000 in 1990. If she sells it in 2026, she owes about $95,725 in federal capital gains tax. If her son inherits the shares instead, the $600,000 gain goes untaxed, permanently.
The provision behind that outcome is Section 1014 of the Internal Revenue Code, better known as the step-up in basis. It took effect in 1921, 105 years ago, and it still resets the tax clock on nearly everything Americans own when they die.
How Section 1014 Resets Your Cost Basis at Death
Basis is what you paid for an asset plus improvements. Your taxable gain is the sale price minus basis. Under Section 1014(a)(1), an heir’s basis becomes the asset’s fair market value on the date of death. The decades of growth before that day never show up on anyone’s return.
The executor can choose an alternate valuation date six months after death under Section 2032, but only if the lower value cuts estate tax, and the election covers every asset in the estate. The step-up also applies to assets held in a revocable living trust, per Section 1014(b)(2). Inherited property always counts as long-term, so heirs get the lower capital gains rates even if they sell the following week.
Watch a $600,000 Gain Disappear in One Day
Assumptions: the widow files single in 2026 with $60,000 of other taxable income. The 15% rate applies up to $545,500 of taxable income and 20% above it. Her son sells a few months after her death for $655,000.
| Line | She sells before death | Son inherits, then sells |
|---|---|---|
| Basis | $40,000 | $640,000 |
| Taxable gain | $600,000 | $15,000 |
| Tax at 15% | $72,825 | $2,250 |
| Tax at 20% | $22,900 | $0 |
| Federal total | $95,725 | $2,250 |
Her bill would also include the 3.8% net investment income tax on much of the gain, plus state tax in most states. Her son pays tax only on growth after her death.
Trillions in Gains Waiting for the Reset
U.S. household net worth hit $185.7 trillion in the second quarter of 2026, a record, according to Federal Reserve data. Real estate held by households and nonprofits reached $54.1 trillion, and nonfinancial corporate equities were valued at $83.1 trillion. Those figures measure total asset value. Still, the Case-Shiller national home price index has rose about 83% since October 2016, to 337.3.
The Joint Committee on Taxation estimated the step-up cost about $42 billion in federal revenue in 2021. With the 2026 estate tax exemption set at $15 million per person, most estates escape both estate tax and income tax on that growth.
Why Congress Wrote It in 1921 and Kept It
A federal estate tax was introduced in 1916. It taxes an estate’s full market value, so Congress apparently saw a second income tax on the same appreciation as double taxation. The Tax Reform Act of 1976 replaced the step-up with carryover basis. Record-keeping complaints held up it, and the Crude Oil Windfall Profit Tax Act of 1980 repealed it. A limited carryover regime returned only in 2010, the one year the estate tax lapsed. Repeal proposals surfaced again in 2021 and died.
Exceptions That Cost Heirs the Step-Up
- Retirement accounts: Traditional IRAs and 401(k)s count as income in respect of a deceased person under Section 1014(c). Heirs pay ordinary income tax on withdrawals.
- Lifetime gifts: Shares you give away keep your original basis under Section 1015.
- Deathbed returns: If you give appreciated property to a dying relative within one year of death and it comes back to you, Section 1014(e) blocks the step-up.
- Spouses: In community-property states, both halves step up under Section 1014(b)(6). Married joint tenants elsewhere generally get a step-up on only the decedent’s half.
Moves That Put the 1921 Rule to Work for Your Family
- Spend in the right order. Draw from IRAs and high-basis holdings first, and keep your lowest-basis stock and real estate for heirs.
- Gift cash, bequeath gains. Give children cash or high-basis shares while you’re alive, and leave the big unrealized gains in your estate.
- Document the date-of-death value. To preserve the Section 1014 basis, document the fair market value on the applicable estate-tax-value date. If the estate is required to file an estate tax return, the executor must file Form 8971 and furnish Schedule A to a beneficiary.
Deciding whether to sell, hold, or gift an appreciated asset late in life is a calculation worth running with a fiduciary advisor or CPA, because the right answer depends on your state, your health, and who inherits. The paperwork around the transfer matters just as much, which is why we put the full estate checklist, beneficiary forms and titling included, in a free report.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
