To determine the stepped-up basis in real estate, take the property’s fair market value on the date the previous owner died and adjust it for how the property was owned. That number, established by Internal Revenue Code Section 1014, replaces whatever the decedent originally paid. Getting to a defensible figure takes three things: the exact date of death, a professional appraisal tied to that date, and the deed showing the ownership structure.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Why the Step-Up Matters Before You Calculate It
When someone inherits real estate, the IRS resets the cost basis from whatever the original owner paid to fair market value at the date of death. Every dollar of appreciation that built up during the decedent’s lifetime disappears from the tax calculation. A parent who bought a house for $100,000 that was worth $600,000 at death leaves an heir with a $600,000 basis. Sell for that price and the taxable gain is zero.
One useful quirk: inherited property is automatically treated as held long-term, even if you sell it the day after inheriting. Any gain above the new basis qualifies for long-term capital gains rates rather than ordinary income rates.2Office of the Law Revision Counsel. 26 US Code 1223 – Holding Period of Property
The Three Documents You Need
The date of death sets the valuation point. Every figure flows from that single date, and if the estate later elects an alternative valuation date, the six-month clock starts here too.
A professional appraisal is the cornerstone of a defensible basis. The IRS expects appraisals prepared by a qualified appraiser under the Uniform Standards of Professional Appraisal Practice. This is the document you rely on if the IRS ever questions the reported basis, whether during estate administration or years later when the heir sells. For a typical single-family home, expect roughly $300 to $600; complex or high-value properties cost more.
The deed, recorded at the county recorder’s office or registry of deeds, tells you the ownership structure and the ownership percentages. The type of ownership drives how much of the property gets stepped up: sole ownership, joint tenancy with right of survivorship, tenancy in common, or community property. Any liens or encumbrances on the deed can also affect valuation.
Sole Ownership: Full Step-Up
When the decedent owned the property outright, the entire fair market value on the date of death becomes the heir’s new basis.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent The original purchase price, the cost of improvements, and accumulated depreciation stop mattering. The slate is wiped clean at the appraised value.
A home bought for $150,000 in 1990 and appraised at $725,000 at death gives the heir a $725,000 basis. A sale at $730,000 produces $5,000 of taxable gain. The $575,000 in appreciation that accumulated over the decades is gone from the calculation.
Joint Ownership: Partial Step-Up
Joint Tenancy With Right of Survivorship
When two or more people hold property as joint tenants with right of survivorship, only the decedent’s share receives the step-up. The surviving owner keeps their original basis on their portion. The result is a blended basis.
Two siblings buy a property together for $200,000, so each starts with a $100,000 basis. The property is worth $500,000 when one sibling dies. The survivor now holds $100,000 of original basis on their half plus $250,000 of stepped-up basis on the inherited half, for a total of $350,000. A sale at $500,000 produces $150,000 of taxable gain, which reflects the appreciation on the survivor’s original share only.
Tenancy in Common
Tenancy in common follows the same fractional logic, but the shares don’t have to be equal. Whatever percentage the decedent held according to the deed is the percentage that gets stepped up. If the decedent owned 25% of a property worth $800,000, only $200,000 of the total value is adjusted. The other 75% keeps whatever basis those owners already had.
Community Property: The Double Step-Up
Married couples in community property states get a substantially better outcome. When one spouse dies, the entire property, including the surviving spouse’s half, is stepped up to fair market value. The IRS describes it plainly: “the total fair market value of the community property, including the part that belongs to you, generally becomes the basis of the entire property.”3Internal Revenue Service. Publication 555 (12/2024), Community Property At least half the value of the community property interest must be includible in the deceased spouse’s gross estate for the rule to apply.
The nine community property states are:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
A couple who bought a home for $200,000 that’s worth $900,000 when one spouse dies gives the survivor a $900,000 basis, not $550,000 as they’d get in a non-community-property state where only the decedent’s half is stepped up. Selling immediately produces zero taxable gain on the entire property.
The Alternative Valuation Date
The default valuation is the date of death, but the estate’s executor can elect to value the property six months later instead. This option under IRC Section 2032 exists for situations where property values have dropped after death.4Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation
The election has strict conditions. It’s available only if it reduces both the total gross estate and the combined estate and generation-skipping transfer taxes owed.4Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation It’s also all-or-nothing across the estate; you can’t apply it to the real estate but keep the date of death for other assets. If the property is sold or distributed within those six months, the sale or distribution value becomes the basis instead.
The trade-off matters for heirs. A lower valuation cuts estate tax but also produces a lower stepped-up basis, which means more taxable gain if the property later recovers and is sold at a higher price.
Property Held in Trust
Whether trust-held real estate gets a step-up depends on the type of trust.
Property in a revocable (living) trust receives the full step-up at the grantor’s death. Because the grantor kept control during life, the assets remain part of the grantor’s gross estate, and that inclusion triggers the basis adjustment under Section 1014.
Irrevocable grantor trusts work differently. In Revenue Ruling 2023-2, the IRS confirmed that assets in an irrevocable grantor trust do not receive a stepped-up basis when the grantor dies.5Internal Revenue Service. Revenue Ruling 2023-2 Once property moves into an irrevocable trust, it leaves the grantor’s estate, and Section 1014 only applies to property included in the decedent’s gross estate. The basis stays at the grantor’s adjusted basis before death. The same irrevocable trust that shields assets from estate tax also forfeits the step-up.
Step-Down and the One-Year Gift Rule
Two limits often catch people off guard.
The step is not always up. Section 1014 sets the new basis at fair market value regardless of direction. A house bought for $400,000 that’s worth $300,000 at death gives the heir a $300,000 basis. Sell for $350,000 and you have a $50,000 taxable gain, even though the sale price is below what the decedent originally paid. When values have declined, some estate planners suggest the original owner sell before death to capture the capital loss on their final return.
The one-year gift rule blocks a specific maneuver: gifting appreciated property to a dying relative who then leaves it back. Section 1014(e) provides that if you give appreciated property to someone who dies within one year, and the property comes back to you or your spouse, you don’t get a stepped-up basis. You’re stuck with the decedent’s adjusted basis, which is the same as your original basis before the gift.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent The rule only bites when the property returns to the original donor or spouse; a gift that ends up with a different beneficiary steps up normally.
Reporting and Records
When you eventually sell inherited real estate, report the transaction on Schedule D of Form 1040 and enter the stepped-up basis as your cost basis. If the property was used for business or as a rental, report the sale on Form 4797 instead.6Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040) Any gain above the stepped-up basis is taxed at long-term capital gains rates regardless of how briefly you held the property. High earners may also owe the 3.8% net investment income tax on top.
A separate reporting layer applies only to large estates. Executors of estates required to file a federal estate tax return (Form 706) must also file Form 8971 and furnish a Schedule A to each beneficiary showing the value used for basis purposes.7Internal Revenue Service. About Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent For 2026, the estate tax filing threshold is $15,000,000 per individual, so Form 8971 applies to a small number of estates.8Internal Revenue Service. Revenue Procedure 2025-32 When it does apply, a consistent basis rule under Section 1014(f) prevents beneficiaries from using a basis higher than the value the estate reported.9Federal Register. Consistent Basis Reporting Between Estate and Person Acquiring Property From Decedent
Keep the appraisal, the death certificate, the deed, and any correspondence with the executor in your permanent tax records. The IRS generally has three years to audit a timely filed return, six years if it suspects a substantial understatement, and no time limit at all if a sale was never reported. A solid appraisal from a qualified professional is the strongest protection against a challenge later.