Century-Old Tax Code Section Allows Heirs to Inherit Assets Tax-Free, Costing Government Billions Annually
Section 1014 of the Internal Revenue Code, enacted in 1921, permits heirs to inherit appreciated assets at their fair market value on the date of death, effectively erasing all accumulated capital gains from taxation. This provision cost the federal government approximately $42 billion in lost revenue in 2021 alone and applies to stocks, real estate, and most other assets Americans own. Wealthy individuals can maximize this benefit by spending down tax-deferred retirement accounts and gifting cash during their lifetime while leaving low-basis securities and property to heirs.
The step-up in basis mechanism works by resetting an inherited asset's tax foundation to its market value at the moment of the owner's death. This eliminates any taxable gains accumulated over decades of ownership, allowing heirs to sell immediately without owing capital gains tax on the appreciation that occurred before they inherited it. The provision applies broadly across most asset types—stocks, real estate, and holdings within revocable trusts—and automatically grants inherited property long-term capital gains treatment regardless of how quickly heirs sell.
The scale of untaxed wealth transfer is substantial. American households hold trillions in appreciated assets, with real estate alone valued at over $54 trillion and corporate equities at $83 trillion. The federal government forgoes approximately $42 billion annually in tax revenue due to Section 1014, a figure that could grow as asset values continue rising and estates transfer to the next generation.
The step-up in basis may significantly advantage high-net-worth families, as it allows substantial wealth accumulation to transfer untaxed across generations while lower-income households typically lack assets eligible for such benefits. Wealthy individuals could potentially optimize estate planning by timing asset sales and retirement distributions strategically. However, the provision's broader impact depends on factors including future estate tax exemption levels, asset appreciation rates, and whether policymakers consider modifying or eliminating the rule—each of which could substantially reshape inheritance taxation outcomes.