Step-Up in Basis
Step-up in basis resets an inherited asset's cost basis to its fair market value at the owner's death, potentially erasing deferred capital gains for heirs.
Definition
Step-up in basis is a provision that adjusts the cost basis of an inherited asset to its fair market value on the date of the owner's death. For real estate investors, it is the capstone of a lifelong 1031 strategy often summarized as swap till you drop.
Because a 1031 exchange only defers tax, carrying a low basis forward through each exchange, an investor who keeps exchanging can build up a large embedded gain. At death, the step-up resets basis to current value, and that deferred capital gain and depreciation recapture generally disappear for the heirs. If a property with a $200,000 adjusted basis is worth $1 million at death, the heirs' basis becomes $1 million, and they could sell with little or no taxable gain.
This makes DSTs and 721/UPREIT structures attractive for estate planning, since fractional interests can be divided among heirs, each receiving a stepped-up basis.
Key points
- Resets basis to fair market value at the owner's death
- Can eliminate deferred capital gains and depreciation recapture
- Completes the swap till you drop 1031 strategy
- Passes assets to heirs with little embedded gain
Related terms
Jerry Baker founded Baker 1031 Investments to help exchange investors move from active property ownership into passive, institutional-quality real estate through DST, 721 exchange, mineral royalty, and Opportunity Zone strategies. He holds the FINRA Series 22 and Series 63 registrations and the Securities Industry Essentials (SIE) qualification. Read full bio →
Reviewed by the Aurora Securities, Inc. compliance team — Aurora Securities, Inc., member FINRA/SIPC. Last reviewed July 2026. Securities are offered through Aurora Securities, Inc.; Baker 1031 Investments, LLC is independent of Aurora Securities, Inc.
This glossary entry is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. Definitions are general and may not reflect your specific circumstances — consult your own CPA and attorney. Past performance does not guarantee future results.