Does the estate pay gain tax before it is "stepped-up" to the heir?

[gfunkbigdaddy]

I am named as the beneficiary of my mother's IRA. When she passes away, my cost basis on those stock funds are stepped up to the fair market value on that date.  But what happens to the gains that she accrued?  Does her estate have to pay income tax on those gains that were given to her heir (me)?  Or does the IRS forgive those gains that she never realized?  

For example.  100 shares XYZ bought by her in 1980 for $10 each.  She passes away on 1/1/2026 and XYZ is trading at $250/share.  My cost bases on 1/1/26 is $250/share.  What happens to the untaxed gains of $240/share?

[M-MTax]

There isn't any untaxed gain because the stock is marked to its FMV on the date of her death.....you have no gain.

[SteamTrain · Accepted solution]

But you also said "IRA"  so which is it?   An IRA?...A separate non-IRA brokerage account?...or are you asking about both?

IF stocks are within an IRA (or 401k, 403b etc), then there is no step-up for those, and any $$/stocks/holdings in the IRA that you do not have transferred to an inherited IRA under your control will be fully taxed, unless there were some non-deductible contributions made to her IRA in the past.

.....only stocks in a non-IRA, personal brokerage account get stepped up.

[dmertz]

Nothing in an IRA gets a step-up in basis.

[Opus 17]

An IRA never gets a stepped up basis.  The money was never taxed when it was deposited, and there was no tax paid on the gains, so everything is taxed when it withdrawn, even by the beneficiary.

I also want to nitpick here.  If you are listed as your mother's beneficiary, then you now own a beneficiary IRA (inherited IRA).  There are certain rules you must follow when making withdrawals, depending on your mother's age.  However, if no beneficiary was listed, then the estate owns the IRA.  Generally, the estate will cash out and close the IRA, and all the taxes are passed on to the heirs who divide the money.  There is no stepped up basis.

Can you clarify if you are the beneficiary, or if the estate was beneficiary? 

Other assets, like regular broker accounts, a house, or other investments, do get a stepped up basis.  There is no tax on unrealized gains, it just goes away, by operation of law (that some politicians want to change, but that is a discussion for a different forum). 

[gfunkbigdaddy]

Yes, sorry I meant to say this is a Brokerage account question, not an IRA for this scenario.  Your explanation is very clear and helpful, thanks!