Physicians spend a lot of time learning how to earn money, save money, invest money, and eventually protect that money.

But there is one tax rule that does not usually get enough attention until later in the wealth-building journey. And by then, it can have enormous implications for your family, your estate plan, and the assets you leave behind.

That rule is the step-up in basis.

It sounds technical. And, admittedly, it is not the most exciting phrase in personal finance. But for anyone who owns appreciated assets in a taxable brokerage account, real estate, rental properties, a business, or other investments outside of retirement accounts, it can be incredibly powerful.

In some cases, the step-up in basis can eliminate hundreds of thousands of dollars in capital gains taxes that otherwise would have been owed if those same assets were sold during life.

That is why this concept matters so much for physician investors. As our income rises and our wealth-building plan matures, many of us eventually accumulate assets outside of our retirement accounts. We buy index funds in taxable accounts. We invest in real estate. We build businesses. We own assets that, hopefully, appreciate over time.

And when those assets appreciate, taxes become part of the equation.

So let’s break down exactly what a step-up in basis is, how it works, where it applies, where it does not apply, and why it remains one of the most important estate planning concepts for doctors and their families to understand.

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What Is Basis?

Before understanding a step up in basis, you first need to understand what “basis” means.

In tax terminology, your basis is generally the amount you invested in an asset. The IRS uses your basis to determine how much gain or loss you have when you sell that asset.

For example:

• You invest $100,000 into a taxable brokerage account.
• Over time, that investment grows to $500,000.
• Your basis remains $100,000.
• Your gain is $400,000.

If you sold the account during your lifetime, you would generally owe long-term capital gains taxes on that $400,000 gain.

The same principle applies to individual stocks, ETFs, mutual funds, rental properties, vacation homes, and many other appreciating assets.

What Is a Step Up in Basis?

Under current federal tax law, most property inherited from a deceased individual receives a new basis equal to its fair market value on the date of death. This rule is established under Internal Revenue Code Section 1014.

This adjustment is a step up in basis.

Here's how it works

Let's continue with our previous example:

• Original investment: $100,000
• Value at death: $500,000

If the owner sells the investment while alive, they owe taxes on the $400,000 gain.

However, if the owner passes away and leaves the account to their children, the heirs generally receive a new basis of $500,000, which is the fair market value at the date of death.

If the children immediately sell the account for $500,000, there may be little or no taxable capital gain because their basis is now equal to the current value.

In practical terms, the appreciation that occurred during the original owner's lifetime may never be subject to capital gains tax. That is why step-up in basis is often considered one of the most powerful wealth transfer provisions in the tax code.

A Real Estate Example

The concept becomes even more striking when applied to real estate.

Imagine a couple purchased a rental property decades ago for $200,000. Over the years, the property appreciates and is worth $1 million when the surviving owner passes away. If they sold the property during their lifetime, they would face substantial capital gains taxes, especially after accounting for depreciation recapture and appreciation.

However, if the property passes to their heirs, the heirs generally receive a basis equal to the property's fair market value at the owner's death. This is why Selenid and I plan to keep our rental properties forever. (Although if we do ever sell, we would use a 1031 exchange to avoid paying immediate taxes…)

If the heirs sell the property shortly thereafter for approximately $1 million, the taxable gain may be minimal.

This can potentially save families hundreds of thousands of dollars in taxes.

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Why the Step-Up in Basis Matters for Generational Wealth

One of the biggest advantages of long-term investing is compound growth.

The challenge, however, is that appreciated assets typically create tax liabilities when sold if they are in taxable accounts . The step up in basis effectively resets the tax clock.

For families focused on long-term wealth creation, this can make holding appreciated assets throughout life an attractive strategy.

Many investors intentionally maintain highly appreciated taxable investments because they know those assets may eventually receive a step up in basis when transferred to heirs. This does not mean investors should never sell appreciated assets. Investment decisions should always align with financial goals, diversification needs, and risk tolerance.

However, understanding the tax consequences can help inform better long-term planning decisions. This is where the real value of a tax advisor comes into play. Which makes this the perfect time to add a disclaimer: This article is for educational purposes only and should not be considered tax, legal, or financial advice. Tax laws are complex and subject to change. Consult a qualified CPA, tax professional, or estate planning attorney regarding your specific situation.

Assets That Commonly Receive a Step Up in Basis

Assets that often qualify include:

• Taxable brokerage accounts
• Individual stocks
• ETFs and mutual funds
• Real estate
• Rental properties
• Privately held businesses
• Partnership interests
• Certain trust assets
• Collectibles and other capital assets

In general, if an asset is included in a decedent's taxable estate, it may qualify for a basis adjustment under current law. You can review the complete statutory language in IRC Section 1014.

Important Exceptions

Not every inherited asset receives a step-up in basis.

One of the most important exceptions involves traditional retirement accounts.

Traditional IRAs and 401(k)s

Traditional IRAs and employer-sponsored retirement plans such as 401(k)s generally do not receive a step-up in basis. Instead, beneficiaries typically pay ordinary income taxes when they take distributions. The IRS provides guidance for beneficiaries of retirement accounts here.

Roth IRAs

Roth IRAs operate differently. Qualified distributions are generally tax-free because taxes were already paid before the funds entered the account. While Roth accounts do not receive a traditional step-up in basis, beneficiaries often inherit the account's tax-free treatment.

Gifts Made Shortly Before Death

There are also special rules involving appreciated property gifted within one year of death and then returned to the original donor or the donor's spouse. In these situations, the normal step-up rules may not apply.

Because of these complexities, professional tax and estate planning advice is often worthwhile for larger estates.

Has the Step Up in Basis Been Eliminated?

No.

As of 2026, the federal step-up in basis rule remains in effect under Internal Revenue Code Section 1014.

Over the years, lawmakers have proposed various changes to estate tax rules and basis adjustments. Some proposals have included limiting or eliminating the step-up in basis for certain taxpayers or certain asset levels.

While these proposals have generated significant discussion, no current legislation has been enacted that broadly eliminates the step-up in basis for inherited property. Current law continues to provide this benefit for most inherited assets.

As always, tax laws can change, which is why you should review your estate plans periodically.

The Bottom Line

The step-up in basis is one of the most valuable tax advantages available for families building long-term wealth.

In simple terms, inherited assets generally receive a new basis equal to their fair market value at the owner's death. This can dramatically reduce or even eliminate capital gains taxes on appreciation that occurred during the original owner's lifetime.

For physician investors holding appreciated stocks, taxable brokerage accounts, real estate, or business interests in their investment waterfall (which will be pretty much all of us), understanding this rule can play a major role in estate planning and wealth transfer decisions.

While no one should let the tax tail wag the investment dog, knowing how the step-up in basis works can help families make more informed decisions about investing, legacy planning, and preserving wealth across generations.

What do you think? Have you considered how the step up in basis will play into your investment and estate plan? How will it? Do you have an over-arching tax strategy for your wealth building plan? Let me know in the comments below!