"Basis" is a principal's original out-of-pocket investment in a business (plus any additional capital contributions), which must be reported to the IRS when a business interest is sold, and must be used in calculating gains and losses.

When an owner dies, the income tax basis of appreciated property which is included in the deceased's estate for federal estate tax purposes is "stepped-up" (increased) to its fair market value at the date of death. Thus, there is no taxable gain if the property is subsequently sold. If property is depreciated, its value is "stepped-down" at the deceased's death.

If property is jointly owned by husband and wife, only the deceased's share is stepped-up in value at the owner's death.

The deceased's personal representative may elect to have property valued on an alternate valuation date, which is typically six months after the date of death. In this case, the stepped-up basis will be the property's fair market value as of the alternate valuation date.