A step-up in cost basis is one of the easiest ways to pass on wealth from one generation to the next, without incurring a significant tax bill. When you sell property there is always the potential for tax to be owed on the profit of that sale.
For instance, if you buy 100 shares of XYZ at $5/share and sell it 3 years later at $10/share, then you would owe taxes on $500 of long-term gains. This is calculated by subtracting your $500 cost basis from the net proceeds of the sale, $1,000.
If your parents bought 100 shares of XYZ at $1/share, then their cost basis would be $100. If you inherited their shares and did not receive a step-up in cost basis, then you would owe taxes when you sell the stock. If you sold the shares at $10/share, then you would owe taxes on $900 of capital gains.
Due to a step-up in cost basis, the cost-basis you realize once you inherit the property is the Fair Market Value of the property on the previous owners date of death. If you inherit 100 shares of XYZ stock, and the stock was worth $8/share the day the previous owner passed, then your cost basis is $8/share, or $800. If you sell it for $10/share, then you would only owe taxes on $200 of gains.
To see if the property you inherit might be eligible for a step-up in cost basis, follow along with this flowchart.