Before watching, watch the videos below so you understand which Tax Buckets I’m talking about in the video:
Tax Buckets – How EVERYTHING Gets Taxed
Tax Buckets” Part II – How EVERYTHING Gets Taxed When We Die
Summary: Cost basis is one of those “quiet” tax rules that can save (or cost) your family a lot of money — and most people don’t understand it until it’s too late.
In this episode of The Retirement Cheat Code, JD White explains how capital gains taxes work when you pass non-retirement assets (like brokerage accounts, real estate, crypto, or collectibles) to a spouse or kids — including the step-up (and step-down) rules that can completely change the tax bill.
Capital Gains After You Die: What Your Spouse and Kids Need to Know
Hi everyone, JD White here. By now, you probably understand the IRS is going to get their hands on your money — either while you’re alive or when you die. Today we’re talking specifically about how non-retirement assets work when it comes to capital gains for a surviving spouse vs. beneficiaries, because the rules aren’t the same.
What Counts as a Non-Retirement Asset
This topic applies to “normal” accounts and property — meaning anything not held inside a retirement account like a traditional IRA, 401(k), or Roth IRA.
Examples include:
- Checking and savings accounts (and anything they generate in interest)
- Real estate (primary home, rental property)
- Taxable investment accounts (individual or joint)
- Cryptocurrency
- Precious metals
- Collectibles (art, silver, jewelry)
Some of these create taxes as you go (interest/dividends). Others don’t really show up tax-wise until you sell — or until someone inherits them.
Capital Gains 101: The Simple Version
Capital gains are the tax you pay when you buy something at one price and later sell it for more.
The exact rate depends on the asset:
- Collectibles can be taxed up to 28%
- Stocks and bonds are commonly taxed at 15% (sometimes 20% depending on income)
- Real estate depends on whether it’s a primary residence vs. rental, plus other factors
But the big concept for today is this: when someone inherits an asset, the capital gains tax depends on the “cost basis” they inherit.
The Big Rule: Step-Up in Cost Basis
Cost basis is basically what the IRS considers the “starting value” for calculating gain.
Here’s the cleanest example I can use:
Fred and Wilma buy Apple stock for $10,000.
It grows to $1,000,000.
They both pass away.
Their kids inherit it.
Now the kids’ new cost basis is $1,000,000.
So if the kids sell it immediately for $1,000,000, they owe:
- No capital gains tax
If the stock rises to $1,100,000 before they sell, they owe capital gains on:
- The $100,000 increase
That’s the classic step-up rule — and it’s one of the biggest tax advantages in the entire financial planning world.
What Changes When a Spouse Inherits
Things get more complicated when only one spouse passes away and the surviving spouse sells.
In most states, the surviving spouse gets a “half step-up” in cost basis.
Same example:
- Fred and Wilma buy Apple stock for $10,000
- It grows to $1,000,000
- Fred passes away
- Wilma sells
In many states, Wilma’s cost basis is stepped up on only half the gain. So she may owe capital gains on the other half when she sells.
Community Property States: The Big Exception
Let me call out nine community property states where the surviving spouse can get a full step-up (basically treated like the “kids” example).
Community property states:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Bonus: Alaska lets you opt in to community property rules.
In these states, if Fred passes and Wilma inherits, the asset may receive a 100% step-up in basis — which can dramatically reduce (or eliminate) capital gains if she sells.
Yes, This Also Applies to Real Estate
The same cost basis rules can apply to a home or other property.
So if a spouse passes away and the surviving spouse sells and downsizes, the cost basis adjustment can impact whether capital gains show up — especially if the property has appreciated significantly.
(There are additional home-sale rules and exclusions, but the key takeaway here is that the step-up rules matter for real estate too.)
The Part Most People Miss: Step-Down Can Happen Too
This can work in reverse.
If Fred and Wilma bought stock for $1,000,000 and it’s worth $500,000 when they pass away, the heirs inherit a cost basis of $500,000.
So if it rebounds later and the kids sell at $1,000,000, they could owe capital gains on:
- $500,000 of gain
This is why timing, valuation, and planning matter — because assets don’t only go up.
Why This Matters for Your Plan
My goal with this video is simple: understand how cost basis changes when assets pass to:
- A surviving spouse
- The next generation
Because those rules can create very different tax consequences — and the decisions your spouse or kids make after you’re gone can dramatically change what they keep.
If you’re new here, don’t forget to subscribe — and we’ll see you on the next one.
