Maximizing Step-Up in Basis: Inherited Business Tax Strategy

The stepped-up basis under IRC 1014 is often the biggest tax benefit of inheritance. Understanding which assets qualify and documenting basis carefully maximizes your benefit.

IRC 1014 resets the clock. When you inherit property, your cost basis generally becomes the fair market value at the date of death -- not what the original owner paid. This eliminates all unrealized capital gains that accumulated during the decedent's lifetime.

Entity type changes the math. Sole proprietorship assets get a straightforward step-up. Partnership and LLC interests may require a Section 754 election to adjust the inside basis of individual assets. S-corp stock gets a step-up, but the underlying corporate assets do not automatically follow. C-corp stock gets a step-up at the shareholder level only.

Timing matters. The executor can choose between the date-of-death value or the alternate valuation date (six months later) under IRC 2032. This election applies to the entire estate, not individual assets, so it requires careful analysis.

The pitfall: Without a timely Section 754 election for partnerships, you may own an interest with a stepped-up outside basis but continue paying tax on the old inside basis of the assets -- effectively losing the benefit Congress intended.