Inherited Assets: Step-Up in Basis, Taxes, and What to Do First | Family Wealth Management NJ

Inheritance Taxes and Step-Up in Basis: What Should I Know?

Quick Answer

When you inherit certain assets — such as taxable brokerage investments, real estate, or other property — the cost basis of those assets is typically “stepped up” to the fair market value at the date of death. This means that if you sell the inherited asset shortly after inheriting it, you may owe little or no capital gains tax. 

This is a meaningful tax benefit — and one that is easily lost if you make decisions quickly without understanding the tax basis first. 

Note: inherited retirement accounts (IRAs, 401(k)s) work very differently. They do not receive a step-up in basis. Withdrawals from inherited retirement accounts are generally taxable as ordinary income. 

The WealthCare Perspective

Inheritance decisions are often made under emotional pressure and time constraints. The first thing our team tells clients who have inherited assets is: slow down. 

The step-up in basis is a powerful tax benefit — but it only applies to certain asset types. Before selling anything, it’s worth understanding:

• What type of account the asset is in (taxable vs. retirement)
• What the date-of-death fair market value was
• Whether NJ inheritance tax applies (NJ has an inheritance tax on assets passing to certain beneficiaries)
• Whether the estate is also subject to the federal estate tax

New Jersey Inheritance Tax — A Local Note

New Jersey is one of the few states with both an estate tax threshold and a separate inheritance tax. The NJ inheritance tax applies to assets passing to certain beneficiaries (not spouses or direct linear descendants in most cases), at rates from 11% to 16%. 

This is an area where working with an advisor who understands NJ-specific tax law — and who coordinates with your estate attorney — can make a meaningful difference in the net amount your family receives. 

Common Mistakes

• Selling inherited real estate immediately without first obtaining a formal date-of-death appraisal to establish the stepped-up basis
• Confusing inherited taxable assets with inherited retirement accounts — very different tax rules apply
• Not coordinating with a CPA and estate attorney before liquidating large inherited positions 

What to Do Next

If you have recently inherited assets and are trying to understand the tax and planning implications, we can help. Contact us today or learn more about our Tax Planning Services here.