Under §1014, inherited property will have a basis equal to the fair market value of the property on the date of the decedent’s death. This is commonly referred to as a “step-up in basis”, although it just as easily could be a step down in basis.
Items which represent “Income in Respect of a Decedent (IRD)” do not receive an adjustment to their basis. This includes items which the deceased has the right to receive prior to death and which would have been ordinary income if he/she had received the items.
The most common examples of IRD include wages, interest accrued on U.S. Savings Bonds, installment sales, and pensions and IRAs. These IRD items will be taxed to the beneficiary in the same manner as they would have been taxed to the decedent.