When you inherit property, your tax basis is generally the fair market value of that property on the date the previous owner died, not what they originally paid for it. This reset is known as the step-up in basis for inherited property, and it can erase decades of appreciation from the tax ledger in a single moment.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent It applies to real estate, stocks, and most other capital assets, with several important exceptions covered below.
How the Reset Actually Works
Your “basis” in an asset is normally what you paid for it, plus improvements and transaction costs. When you sell, capital gains tax hits the difference between the sale price and that basis. Inherited property breaks that pattern. Instead of taking on the decedent’s original purchase price, you receive a basis equal to the property’s fair market value at the date of death.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Picture a parent who bought a home for $120,000 in 1992. By the time they die, it’s worth $550,000. If the parent had sold during life, they would have owed capital gains tax on $430,000 of profit. Because their child inherits instead, the child’s basis resets to $550,000. Sell the next day at $550,000 and the taxable gain is zero. Three decades of appreciation, gone from the tax ledger.
The savings can be substantial. Long-term capital gains rates for 2026 reach as high as 20% for top earners, plus a potential 3.8% net investment income tax. On $430,000 of erased gain, the reset can save the heir over $100,000 in federal taxes alone. That’s why estate planners often recommend holding appreciated assets until death rather than selling or gifting them during life.
The Reset Can Also Go Down
If an inherited asset is worth less than the deceased paid for it, your basis drops to the lower fair market value.2Internal Revenue Service. Gifts and Inheritances Say a parent bought stock for $50,000 and it was worth $15,000 at death. Your basis becomes $15,000. That $35,000 built-in loss vanishes permanently. You can’t claim it, and any future gain or loss is measured from the lower number.
Families sometimes lose this money without realizing it. If a terminally ill person holds assets that have dropped significantly, selling before death lets them or their estate recognize the loss for tax purposes. Once the owner dies, the loss is gone.
Establishing the Date-of-Death Value
Everything above depends on knowing what the property was actually worth on the date of death. The method varies by asset type.
Real Estate
A professional appraisal is the standard approach. The appraiser evaluates the property as of the exact date of death, using comparable recent sales in the area. Date-of-death appraisals for a single-family home typically run between $350 and $1,000, depending on complexity and location. Keep the appraisal permanently. It’s your primary defense if the IRS ever questions the basis you reported.
Publicly Traded Securities
Stocks, bonds, and mutual funds with active markets follow a specific formula: the basis is the average of the highest and lowest quoted selling prices on the date of death.3GovInfo. 26 CFR 20.2031-2 – Valuation of Stocks and Bonds If the death falls on a weekend or holiday when markets are closed, the valuation blends weighted averages from the nearest trading days before and after.
Cryptocurrency
The IRS treats cryptocurrency as property, so inherited digital assets receive a step-up like stocks or real estate. Valuation follows the trading price on the exchange where the asset would have been recorded, at the date and time of death. Because crypto trades around the clock, pinpointing the exact time matters more than it does for traditional securities.
Joint Ownership and Partial Resets
When property is held in joint tenancy with right of survivorship, only the deceased co-owner’s share resets. How large that share is depends on who the co-owners are.
For spouses holding property as joint tenants or tenants by the entirety, exactly half of the value is included in the deceased spouse’s estate, regardless of who actually paid for it.4Office of the Law Revision Counsel. 26 USC 2040 – Joint Interests – Section: Subsection (b) The surviving spouse gets a reset on that half. Their own half keeps its original basis.
For non-spouse joint tenants, such as a parent and adult child, the rules are harsher. The IRS presumes the entire property value belongs to the first tenant who dies, unless the surviving co-owner can prove they contributed their own money toward the purchase.5Office of the Law Revision Counsel. 26 USC 2040 – Joint Interests – Section: Subsection (a) So if a parent bought a $400,000 property and added an adult child to the title without the child paying anything, the full $400,000 is included in the parent’s estate at death, and the child receives a full step-up on the entire property. But if the child contributed half the purchase price and can document it, only the parent’s half resets.
Documentation matters. Without records of each co-owner’s contributions, the IRS defaults to full inclusion in the deceased tenant’s estate.
Community Property Gets a Double Reset
Married couples in community property states get a significant advantage. When one spouse dies, both halves of any community property receive a step-up to fair market value, not just the deceased spouse’s share.6Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent – Section: Subsection (b)(6) The result can be zero capital gains on the entire asset, not just the decedent’s half.
Take a couple who bought a home together for $200,000 in a community property state. At the first spouse’s death, the home is worth $900,000. In a common law state, only the deceased spouse’s $100,000 half would step up to $450,000, leaving the survivor with a blended $550,000 basis. In a community property state, both halves reset, giving the surviving spouse a full $900,000 basis. An immediate sale produces no taxable gain.
Nine states follow community property rules: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Three additional states, Alaska, South Dakota, and Tennessee, let married couples opt into community property treatment through a trust or written agreement. The trust must be properly established before the first spouse’s death.
Property That Doesn’t Get a Step-Up
Traditional IRAs, 401(k)s, and Similar Retirement Accounts
Tax-deferred retirement accounts are classified as “income in respect of a decedent.”7Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents They were funded with pre-tax dollars, and the original owner never paid income tax on the money. Because of that deferral, the balance doesn’t reset. When you withdraw funds as beneficiary, the entire distribution is taxed as ordinary income, exactly as it would have been in the original owner’s hands.8eCFR. 26 CFR 1.691(a)-1 – Income in Respect of a Decedent Other items in this category include unpaid wages, accrued but unpaid interest, and accounts receivable the decedent had earned but not yet collected.
Gifts You Received During Life
Property you received as a gift while the donor was alive does not get a step-up when the donor eventually dies. You take the donor’s original basis, a “carryover basis.”9Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust A parent who gifts a $500,000 home originally purchased for $100,000 passes along a $100,000 basis. The child is exposed to $400,000 of potential capital gains. Had the parent held the home until death, the child would have inherited a $500,000 basis and owed nothing on immediate sale.
A narrow exception: if the donor paid gift tax on the transfer, part of that gift tax can be added to basis, limited to the share attributable to the property’s net appreciation. For most gifts within the lifetime exemption where no gift tax is due, this adjustment does nothing.
Property Gifted Back to the Donor Within a Year
The tax code blocks a specific maneuver. If appreciated property is gifted to someone who dies within one year, and the property passes back to the original donor or the donor’s spouse, no step-up occurs. The basis stays at the decedent’s adjusted basis immediately before death.10Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent – Section: Subsection (e) If the property passes to someone other than the donor, the normal step-up applies.
Qualified Opportunity Zone Investments
Investments in Qualified Opportunity Funds follow their own basis rules and are excluded from the standard step-up. The beneficiary inherits the same basis the decedent held. If the investment was a mixed-funds position containing both qualifying and non-qualifying portions, the non-qualifying portion does receive a normal step-up.
Trust-Held Property
Whether trust assets step up depends entirely on the type of trust.
Assets in a revocable living trust are still treated as part of the grantor’s taxable estate because the grantor could have taken them back at any time. When the grantor dies, everything in the revocable trust receives a step-up to fair market value, just as if the grantor had owned the property outright. This is one reason revocable trusts are common in estate planning. They avoid probate without sacrificing the basis reset.
Irrevocable trusts work differently. Because the grantor has permanently given up control, the assets generally leave the grantor’s taxable estate. No estate inclusion means no step-up. The IRS confirmed this in Revenue Ruling 2023-2, holding that assets transferred to an irrevocable grantor trust through a completed gift do not receive a basis adjustment at the grantor’s death.11Internal Revenue Service. Internal Revenue Bulletin 2023-16 – Revenue Ruling 2023-2 The basis after death remains exactly what it was before.
There is a real trade-off. Irrevocable trusts offer creditor protection, estate tax reduction, and valuation discounts. The price is permanently forfeiting the step-up. For families whose estates fall below the federal exemption and would owe no estate tax anyway, an irrevocable trust can cost more in future capital gains taxes than it saves.
Reporting the Basis You Received
For most heirs, the executor of the estate will provide the date-of-death values you need. Executors of estates large enough to require a federal estate tax return must report basis to both the IRS and each beneficiary using Form 8971, accompanied by a Schedule A for each beneficiary listing the assets they received and the reported value of each.12Office of the Law Revision Counsel. 26 USC 6035 – Basis Information to Persons Acquiring Property From Decedents
That reporting is only triggered when the estate must file Form 706, the federal estate tax return. For deaths in 2026, that threshold is a gross estate exceeding $15,000,000.13Internal Revenue Service. What’s New – Estate and Gift Tax Most estates fall below this and never trigger the reporting obligation. If you inherit from a smaller estate, you still need to establish and document the date-of-death value yourself, because you’ll need it when you eventually sell.
If you do receive a Schedule A from an executor, keep it. Under the basis consistency rules, the basis you claim cannot exceed the final value determined for estate tax purposes.14Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent – Section: Subsection (f) Reporting a higher basis on your own return triggers a 20% accuracy-related penalty on any resulting tax underpayment.15eCFR. 26 CFR 1.6662-9 – Inconsistent Estate Basis Reporting If the reported basis is 200% or more of the correct amount, the penalty doubles to 40% for a gross valuation misstatement.16Internal Revenue Service. Instructions for Form 8971 and Schedule A Discrepancies between the estate tax return and your income tax return are exactly the kind of mismatch that IRS automated systems catch.