Does an inherited IRA get a step-up in basis at death?

A fully pretax traditional inherited IRA does not receive the same date-of-death basis reset that generally applies to inherited taxable property. Its taxable balance remains ordinary income when distributed. Nondeductible contributions are different: the decedent’s existing IRA basis carries over and can make part of each distribution nontaxable under Form 8606.

Why can selling inherited stock be almost tax-free right after death?

Inherited taxable property generally receives basis equal to fair market value at death, subject to statutory exceptions. If stock worth $100,000 at death is sold soon afterward for $102,000, the capital gain may be about $2,000. That rule does not apply to the pretax balance inside a traditional IRA, where distribution taxation is deferred ordinary income.

Do I pay capital gains tax when the inherited IRA sells stock?

Generally not on your personal return. Trades inside an IRA do not create personal capital gains in the ordinary way. The tax event is the distribution from the traditional inherited IRA, which is generally ordinary income to the extent taxable. Once property is distributed in kind, later appreciation or loss outside the IRA can create capital gain or loss.

Can I hold an inherited brokerage account longer than 10 years?

Generally yes; a taxable brokerage account does not have the inherited-IRA 10-year distribution rule. The inherited IRA can have a mandatory terminal deadline and, in some cases, annual RMDs. This difference can force retirement-account income into your return while the brokerage assets remain available to hold under ordinary investment and tax rules.

Which account should I spend first?

There is no universal answer. Current capital gain, ordinary-income brackets, state tax, inherited IRA RMDs, future appreciation, cash needs, and estate goals can all matter. A recently inherited brokerage asset may have little gain, while an inherited IRA has a forced distribution timetable. Model both accounts together rather than choosing based on one tax rate alone.

Inherited IRA vs. Inherited Brokerage Account: Why the Tax Treatment Is Completely Different

An inherited taxable brokerage account and an inherited traditional IRA can contain the same stocks but produce completely different tax results. Property inherited outside a retirement account generally receives a basis determined under the inherited-property rules—often fair market value at death—while a traditional inherited IRA’s pretax balance generally remains taxable as ordinary income when distributed.

That means selling stock shortly after death from a taxable brokerage account can create little capital gain if the sale price is close to the new basis. Taking the same dollar amount from a fully pretax inherited IRA can create ordinary income even if the IRA investments have not risen at all since the date of death.

The brokerage account starts with inherited-property basis rules

IRS Publication 559 says the basis of property inherited from a decedent is generally its fair market value on the date of death, subject to alternate valuation and other statutory exceptions. For a capital asset, the recipient also generally receives long-term holding-period treatment regardless of how long the recipient personally held it.

This is often called a “step-up in basis,” although the value can also step down when market value at death is below the decedent’s basis. The tax consequence is tied to the difference between the inherited basis and the later sale price.

The traditional IRA is income in respect of a decedent

Publication 559 specifically treats a taxable inherited traditional IRA distribution as income in respect of a decedent up to the decedent’s taxable IRA balance. The pretax money did not become tax-free merely because the owner died. It is taxed when the beneficiary receives it, subject to any remaining nondeductible basis.

The date-of-death value is important for RMD and reporting purposes, but it does not become a new cost basis that shelters all existing pretax IRA value. If the IRA was $400,000 at death and remains $400,000 when fully distributed, a fully pretax traditional IRA can still produce roughly $400,000 of gross income over the beneficiary’s withdrawals.

Example: the same $100,000 of stock

Assume a decedent owned $100,000 of an S&P 500 fund in a taxable brokerage account with a $35,000 pre-death basis and another $100,000 of the same fund in a fully pretax traditional IRA. The fund is worth $102,000 when the beneficiary sells or distributes it two months after death.

In the brokerage account, the inherited basis may be approximately $100,000, so selling for $102,000 can produce about $2,000 of long-term capital gain. In the traditional inherited IRA, selling the fund inside the IRA is not the beneficiary’s capital-gain event; distributing $102,000 from the IRA can instead produce up to $102,000 of ordinary income.

Why investment performance inside the IRA does not create personal capital gain

An IRA is a tax-deferred account. Trades, dividends, and interest inside a traditional IRA generally are not reported annually on the beneficiary’s Form 1040. Tax character is largely determined at distribution. A stock that appreciated 300% before death does not carry its capital-gain character through a fully pretax traditional IRA distribution.

Outside the IRA, the brokerage account preserves investment-level tax character. A later sale can generate capital gain or loss measured from inherited basis. This difference is why a beneficiary who inherits both accounts should not use one tax rate assumption for both.

Nondeductible IRA basis is the important exception

If the original owner made nondeductible traditional IRA contributions and filed Form 8606, the inherited IRA carries that basis. Publication 590-B says the basis remains with the inherited IRA and, for a non-spouse beneficiary, cannot be combined with basis in the beneficiary’s own traditional IRAs or IRAs inherited from other decedents.

A distribution is then allocated between taxable and nontaxable amounts under Form 8606 rules. That is not a date-of-death basis reset; it is preservation of the decedent’s already-taxed contributions. See how traditional inherited IRA withdrawals are taxed for the existing federal baseline.

RMD deadlines apply only to the retirement account

A taxable brokerage account generally has no federal rule requiring the beneficiary to sell it within 10 years. The beneficiary can hold, sell, gift, or rebalance the securities subject to ordinary tax and estate rules. An inherited IRA is constrained by the federal post-death distribution regime.

A typical non-EDB beneficiary can face a December 31 year-10 endpoint, with annual RMDs also required in certain owner-after-RBD cases. That forced timeline can accelerate ordinary income regardless of what the beneficiary would prefer to do with the investments.

State tax can widen or narrow the difference

States can treat capital gains, retirement income, and death benefits differently. California generally taxes both capital gains and taxable IRA income through its ordinary individual rate structure, although the federal character still differs. Pennsylvania can exclude qualifying beneficiary death payments from taxable compensation while federal IRA income remains taxable.

Use the state inherited IRA tax framework rather than assuming the federal difference maps one-for-one to the state return.

Which account should fund a cash need?

That is a tax-planning question, not a universal rule. Selling recently inherited brokerage assets with little unrealized gain can create less current federal tax than taking the same cash from a fully pretax inherited IRA. On the other hand, the IRA has a forced distribution deadline, while highly appreciated post-death brokerage assets can accumulate capital gain if held.

A beneficiary should model the accounts together rather than treating each in isolation. The inherited IRA cannot be preserved beyond its federal deadline merely because the brokerage account is more tax-efficient to spend first.

Recordkeeping checklist when you inherit both

Obtain date-of-death fair-market-value records for every taxable brokerage security.
Preserve the decedent’s Form 8606 history for any traditional IRA basis.
Do not enter the IRA’s date-of-death value as if it were brokerage cost basis.
Track brokerage sales as capital transactions and IRA distributions as retirement-account distributions.
Map the inherited IRA annual and terminal RMD deadlines separately from brokerage decisions.
Estimate state tax using the state’s treatment of both capital gain and retirement income.
Keep Form 1099-B and Form 1099-R reporting in separate reconciliation files.

The practical takeaway

Two assets can have the same market value and investment holdings but radically different tax attributes because one sits inside a tax-deferred retirement wrapper. The brokerage basis adjustment reflects inherited property law; the IRA carries deferred ordinary income forward to the beneficiary. That structural difference should drive the cash-flow model before the beneficiary sells or distributes anything.

Related Inherited IRA Guides

inherited ira withdrawals and tax brackets a multi year comparison framework

Step-up in basis and income in respect of a decedent solve different tax problems

Section 1014 generally adjusts the basis of property acquired from a decedent to fair market value at death, subject to statutory exceptions. That rule can make a prompt sale of inherited taxable securities produce little capital gain when the sale price is close to the date-of-death value. A traditional IRA is different because its untaxed income is generally income in respect of a decedent; the retirement wrapper deferred income tax rather than creating a capital asset with a fresh outside basis.

This difference means the same stock can create two tax stories. If 1,000 shares are inherited in a brokerage account at a date-of-death value of $100 per share and sold shortly afterward for $102, the beneficiary may have roughly $2,000 of capital gain, ignoring fees and alternate valuation issues. If economically identical shares sit inside a fully pretax inherited IRA worth $102,000, withdrawing $102,000 generally creates ordinary income rather than a $2,000 capital gain.

Do not overstate the contrast where the IRA has nondeductible basis. Form 8606 rules can make part of an inherited traditional IRA distribution nontaxable, and inherited Roth IRA distributions can have different tax treatment. That is why the article compares a fully pretax traditional IRA with a taxable brokerage account as the baseline, then flags basis as the exception.

For estate records, keep date-of-death brokerage valuations and IRA basis documents separately. Brokerage basis supports future capital-gain reporting; IRA basis supports the taxable/nontaxable allocation of distributions. Neither record substitutes for the other, and a custodian may not have complete historical basis for a decedent’s IRA.

Do not assume the brokerage account is always the first asset to spend

The brokerage account may have little embedded gain after a basis adjustment, while the inherited IRA can face a hard distribution deadline. Which asset funds a cash need depends on both current tax cost and future deadlines. Compare marginal tax, remaining 10-year capacity, basis records, and state tax rather than treating “step-up” as an automatic spending order.

This is general information, not personalized tax or legal advice — a CPA or estate attorney can confirm how this applies to your specific inherited account.