As a digitally-minded lawyer, I sometimes find myself watching a short TikTok or Instagram video. The algorithm’s keen understanding of my nerdiness feeds me a steady stream of videos from amateur estate planners and financial planners.

A somewhat recent trend that I have seen is videos explaining why younger folks may not want their parents to gift them the family house.

The influencers assert that it is better to inherit the family house than to have your parents gift you the house during their lives.

On what basis are these influencers making this claim?

The influencers are basing this claim on Internal Revenue Code Section 1014 (“IRC” or “Code”). That Code section generally gives those inheriting an asset (including real estate, securities, etc.) a great tax benefit called “stepped-up basis,” which reduces future capital gain tax exposure.

But is leveraging the stepped-up basis always the best strategy? As you may have already guessed—the answer depends.

Let’s discuss the law behind the stepped-up basis and points to consider when deciding if planning for it is right for you and your family.

What is “basis” anyway?

Tax basis is a tool used to measure the gain or loss that a taxpayer incurs when disposing of assets.

I like to think about basis as a loose measurement for determining profit. Say you bought a house for $100,000 and then later sold that house for $500,000. You did not really make $500,000 on this transaction because you had to spend $100,000 of already taxed dollars to get the house in the first place. Therefore, the gain on this hypothetical example is the sale price ($500,000) less the basis ($100,000), which gets us to a gain of $400,000.

Basis reflects the portion of your investment gains that were already subject to taxes and should not be doubly taxed.

Ways to get basis:

There are three general ways to determine the initial basis of an asset – cost basis, carryover basis, and stepped-up basis.

• The Cost Basis: The first way is known as “cost basis,” which applies when you purchase something, like in the home-buying example above. In that case, your cost basis is generally what you paid for the asset – so, $100,000.
• The Carryover Basis: The second way to determine basis is through “carryover basis.” When you receive a gift of property during the donor’s lifetime, you typically also receive their basis in the property. (The “donor” is the person giving the gift). Using the same home-buying example above, let’s say parents gift the house to their child. The fair market value of the house at the time of the gift is $500,000, but the parents’ basis is $100,000. The child now owns the house and inherits the same $100,000 basis. In other words, the unrealized gain is preserved, and the child assumes the same capital gain exposure the parents had.
• The Basis Adjustment on Inherited Property: The third way to determine the basis of an asset is to inherit the asset. One of the perks of inheriting property is that most inherited property gets an automatic adjustment to the basis so that the potential capital gain is temporarily wiped out. Many refer to this as the “stepped-up basis.” Returning again to the example above, if the child inherited the house when the value was $500,000, then the child’s basis in the house would also be $500,000. Therefore, by inheriting the property, the built-in capital gain exposure drops to zero (until the house appreciates in value, again).

Illustration of the homebuying example discussed in this article showing cost basis, carryover basis and stepped-up basis

Internal Revenue Code Section 1014 and Basis

Section 1014 of the Code contains the rules for determining the basis of inherited property. Generally, the basis of property that passed to the recipient “from a decedent” is the “fair market value of the property at the date of the decedent’s death.” IRC § 1014(a).

Property is considered as passing from the decedent if the property was acquired by bequest, devise, or inheritance. IRC § 1014(b)(1). This includes property passing through the decedent’s Will and/or a Revocable Trust. More specifically, for the basis adjustment to apply, the property must be included in the decedent’s estate for estate tax purposes.

So, what is the tax code really doing here? It’s incentivizing the inclusion of property in one’s taxable estate, because doing so qualifies the property for this favorable basis adjustment.

What the Influencers Are Not Telling You

The influencers are correct that the potential for a stepped-up basis at death is a big deal. But what they often don’t tell you is that:

• The basis adjustment can go down – not just up, and
• Not all property qualifies for the stepup.

Let’s start with the term itself: “stepped-up basis” is a bit of a misnomer. Property tends to appreciate over time, like in the housing example above. However, some assets fluctuate daily in value, especially stocks and commodities. If someone dies during a market downturn, the fair market value at death might actually be lower than what they originally paid.

Why does this matter? Because IRC § 1014(a)(1) doesn’t guarantee a step-up: it simply sets basis at the fair market value on the date of death. This means some assets may receive a “stepped-down” basis, potentially increasing capital gains if the value later rebounds.

Influencers also often skip over the fact that certain property is ineligible for the date of death basis adjustment under IRC § 1014. A common example: qualified retirement accounts. While still subject to estate taxes, the underlying assets do not get a stepped-up basis at death. Instead, they are treated as income in respect of a decedent (IRD) under IRC § 691 and specifically excluded from receiving date of death basis adjustments by § 1014(c).

Estate Planning and the Consideration of Basis

Unlike many influencers, I won’t tell you to never accept a gift or to always wait for an inheritance. The reality is, your situation deserves thoughtful, individualized analysis. You need to consider your immediate financial needs, the value of a stepped-up basis, and any exposure to estate tax.

At Larkin Hoffman, we carefully weigh both the tax implications and the personal and family dynamics. For many people, planning around the stepped-up basis makes sense. But for business owners, entrepreneurs, and high-net-worth individuals, a mix of lifetime gifting (whether outright or in trust) and planning that takes advantage of the stepped-up basis may be a better strategy.

In fact, Erika Toftness and I recently worked with a business owner on a plan that balanced both goals: gifting some assets to reduce estate tax exposure, while intentionally retaining low-basis business interest to capture the stepped-up basis at death. Just as importantly, we factored in the client’s desire to retain control over the business.

The takeaway? Everyone’s circumstances are different. The right strategy isn’t what a stranger on the internet recommends, but one that fits your family, your assets, and your goals.  

The stepped-up basis is a powerful tool in estate planning, and for many people—especially those not subject to federal or Minnesota estate tax—it’s well worth planning for. But it’s not a one-size-fits-all solution. For others, particularly those with large estates or family businesses, estate tax savings may outweigh the benefits of a step-up in basis.

If you’re looking for personalized, practical estate planning advice, feel free to reach out. We would love to help—or connect you with the right attorney for your situation.