How is the basis of property affected when it is inherited?

When property is inherited, the basis of that property is stepped up (or down) to the fair market value on the date of the decedent's death. This means that the inheritor of the property can take the value of the asset at the time of death as the new basis for any future gains or losses when they eventually sell the property. This adjustment is significant because it allows the inheritor to potentially minimize capital gains tax liability if they sell the property for a price that is higher than the fair market value at the time of inheritance but lower than the value that the decedent originally paid for it. Thus, the basis is directly related to the fair market value and not retained as the original owner’s adjusted basis, selling price, or rendered worthless.