A step-up basis is the adjustment of a cost basis for an asset for an investor. Certain factors may initiate a step-up in an investor’s original cost basis, thereby reducing their realized capital gain and associated tax liability. For instance, stock investors who reinvest their dividends may increase their basis by the amount of dividends reinvested. This can reduce the capital gains tax liability that they incur when they sell the investment.​

Regarding Opportunity Funds, according to the Tax Cuts and Jobs Act, investors who hold their qualified Opportunity Fund investment for at least five years prior to December 31, 2026 may step up the initial cost basis of the capital gains they invest in a qualified Opportunity Fund, such that their tax liability is reduced by 10%. For investors who hold their qualified Opportunity Fund investment for at least seven years prior to December 31, 2026, the step up increases such that their capital gains tax liability is reduced by 15%.

For instance, if Sarah invests the $300,000 of capital gains she realized when she sold the small commercial building in a qualified Opportunity Fund, she can defer paying taxes on that gain until December 31, 2026. If her capital gains would typically be subject to a 23.8% rate and she holds her Opportunity Fund investment for at least five years prior to December 31, 2026, she may step up her initial cost basis in her gain from $0 to $30,000 so that she’s only subject to a capital gains tax on $270,000, effectively reducing her tax bill by 10%. If she holds her Opportunity Fund investment for at least seven years prior to December 31, 2026, she can step up her initial basis to $45,000, meaning she’s only subject to capital gains tax on $255,000, effectively reducing her tax bill by 15%.

Learn more:

← Back to all glossary terms