How Step-Up Depreciation Can Create Tax Planning Opportunities

Published on: May 28, 2026 by Michael Kordasiewicz

Updated on: May 28, 2026

When it comes to tax planning, basis matters. Tax basis is generally the amount used to determine gain, loss, depreciation, and other tax outcomes tied to an asset. When that tax basis changes, the tax impact can be significant.

One opportunity that is sometimes overlooked is a step-up in basis. A step-up increases the tax basis of property to its fair market value when certain events occur. In many cases, this adjustment can reduce taxable gain when the asset is later sold.

For depreciable property, such as real estate or certain business assets, it may also create additional depreciation deductions over time.

What Is a Step-Up?

A step-up occurs when the tax basis of an asset is adjusted upward to reflect its fair market value at a specific point in time. A common example is property inherited after someone passes away. Under the general federal tax rule, the basis of property acquired from a decedent is its fair market value at the date of death.

Here is a simple example:

A taxpayer buys stock for $100. Years later, the stock appreciates to $500. If the taxpayer sells the stock during their lifetime, they may recognize a $400 taxable capital gain. However, if the taxpayer passes away and a beneficiary inherits the stock, the beneficiary’s basis may be adjusted to $500. If the beneficiary sells the stock shortly after inheritance for $500, there may be little or no taxable gain.

That same concept can apply to other appreciated assets, including real estate, business interests, and securities.

Why Step-Up Depreciation Matters

For depreciable property, a step-up can do more than reduce gain on a future sale. It may also create a new or increased depreciable basis. That can allow the owner to claim additional depreciation deductions over the useful life of the asset.

This is where step-up depreciation becomes especially valuable for real estate investors and business owners. If an asset has appreciated in value, the step-up may create a larger basis that can be depreciated, helping reduce taxable income in future years. The benefit depends on the type of asset, the character of the property, how the asset is held, and the applicable depreciation rules.

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When Can a Step-Up Opportunity Arise?

Step-up opportunities often come up during major ownership or estate planning events. Common examples include:

Inheritance of Appreciated Property	When someone passes away, assets included in their estate may receive a basis adjustment to fair market value as of the date of death. This can reduce capital gains tax exposure for heirs if the asset is sold later.
Purchase of a Partnership Interest	When a new partner purchases an existing partner’s interest, a Section 754 election may allow a basis adjustment that benefits the buyer.
Redemption of a Partnership Interest	If a partnership redeems an existing partner and has a Section 754 election in effect, the partnership may be able to adjust the basis of its assets.
Transfer of a Partnership Interest After Death	When a partner passes away and their partnership interest transfers to a beneficiary, the beneficiary may receive a basis adjustment if a 754 election is in place.

Step-Up vs. Step-Down

While many people focus on step-ups, not every basis adjustment is favorable. If an asset’s fair market value is lower than its original basis at the time of death, the asset may receive a step-down in basis.

Does Gifting Property Create a Step-Up?

When property is gifted during the owner’s lifetime, the recipient typically receives the donor’s carryover basis rather than a stepped-up basis. Treasury regulations generally provide that the basis of property acquired by gift is the donor’s adjusted basis, subject to special rules when fair market value is lower than basis at the time of the gift.

The choice of gifting vs inheriting depends on the family’s goals, estate tax considerations, and cash flow needs.

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Common Assets That May Benefit from Step-Up Planning

Step-up planning is often relevant for:

Real estate
Marketable securities
Closely held business interests
Partnership interests
Rental properties
Personal property

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Why Planning Ahead Matters

A step-up can create meaningful tax savings, but the opportunity is often tied to timing and documentation. Tax laws surrounding this topic are complex and fact specific. Before engaging with the prospect of a step-up, taxpayers should consult with their advisor regarding their individual situation.