To do a step-up in basis on inherited property, you don’t file anything to claim it — the reset to fair market value at the date of death happens automatically under Internal Revenue Code Section 1014.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Your work is to establish and document the new value, get it recorded with the institutions holding the assets, and report it correctly when you eventually sell. Miss a step and you can end up paying capital gains tax you don’t actually owe, or drawing a penalty from the IRS.
What the Step-Up Actually Does
Basis is the number the IRS subtracts from your sale price to figure your taxable gain. For inherited property, that number resets to the fair market value on the date the prior owner died, replacing whatever they originally paid. Sell shortly after inheriting and there’s often little or no gain to tax; sell years later and only the appreciation after the date of death is taxable.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
The reset works both ways. If the asset lost value during the decedent’s lifetime, the basis steps down to the lower date-of-death value, and you can’t claim a loss based on the original purchase price.2Internal Revenue Service. Gifts and Inheritances It applies to property held in the decedent’s name, in a revocable trust, or in other arrangements included in the taxable estate.3eCFR. 26 CFR 1.1014-1 – Basis of Property Acquired From a Decedent
Confirm the Asset Qualifies
Before you spend money on appraisals, check that the asset gets a step-up at all. Traditional IRAs, 401(k)s, and other tax-deferred retirement accounts don’t. The money went in untaxed, so there is no basis to step up, and distributions are ordinary income to you.4Internal Revenue Service. Retirement Topics – Beneficiary Commercial annuities funded with pre-tax dollars work the same way on the growth portion.
The same exclusion covers anything classified as income in respect of a decedent: unpaid wages, uncashed bonus checks, installment sale payments the decedent hadn’t yet received. You pick up the tax bill the decedent would have owed.5Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents
One anti-abuse rule catches a narrow situation: if appreciated property was gifted to someone who died within a year and it comes back to the original donor, the step-up doesn’t apply. The basis stays at the decedent’s carryover basis from the original gift.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Gather the Documents
Order several certified copies of the death certificate at the outset. Each financial institution will require its own copy, and the federal estate tax return requires one as an attachment if the estate has to file.6Internal Revenue Service. Instructions for Form 706 (09/2025)
Build an inventory of every asset that was included in the estate. For each one, note a description specific enough to identify it, along with how it was owned — sole ownership, joint tenancy with survivorship, tenancy by the entirety, or trust. Ownership structure affects whether and how the step-up applies. Original purchase records aren’t strictly needed, since the old basis is being replaced, but keeping them helps confirm you’re looking at the right assets.
Establish Fair Market Value at the Date of Death
This is the number the entire step-up rests on, and getting it right is the most important part of the process.7Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators Different assets call for different methods.
Real Estate
Hire a licensed or certified appraiser who follows the Uniform Standards of Professional Appraisal Practice. The appraisal should be pegged to the date of death and look at the property’s condition, location, and comparable sales as of that date. The written report is your primary evidence if the IRS ever questions the basis. Residential appraisals commonly run from a few hundred dollars to over $1,000, with commercial property and large acreage costing more.
Publicly Traded Stocks and Bonds
Skip the appraiser. Federal regulations set a specific formula: the fair market value is the mean of the highest and lowest quoted selling prices on the date of death, not the closing price. If the stock traded between $48 and $52 that day, the value is $50. Weekend and holiday deaths use a weighted average of the nearest trading days before and after.8eCFR. 26 CFR 20.2031-2 – Valuation of Stocks and Bonds
Jewelry, Art, and Collectibles
Use a specialist appraiser in the relevant field. A jewelry appraisal should describe cut, weight, brilliance, color, and flaws, with gemological certificates and photographs where possible.9Internal Revenue Service. Publication 561, Determining the Value of Donated Property Art appraisals need detailed descriptions and condition reports. The IRS penalizes serious valuation misstatements at 20% of the underpayment, or 40% for a gross misstatement.7Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators
Alternate Valuation Date
If the estate has to file Form 706, the executor can elect to value all assets six months after the date of death rather than on it. The election is only available if it reduces both the gross estate and the total estate and generation-skipping transfer taxes.10eCFR. 26 CFR 20.2032-1 – Alternate Valuation It applies to every asset in the estate, not a chosen few, and any asset sold during the six-month window is valued as of the sale date.
The Community Property Double Step-Up
Married readers in a community property state should look at this carefully. When one spouse dies, both halves of community property get a stepped-up basis, provided at least half the value is included in the decedent’s gross estate.11Internal Revenue Service. Publication 555, Community Property In a common-law state, only the decedent’s half steps up; the surviving spouse’s half keeps its original basis. The difference on a long-held home can be substantial, so surviving spouses should get an appraisal of the full property, not just the decedent’s share.
Get the New Basis on the Books
The step-up exists in law the moment the prior owner dies, but the institutions holding the assets don’t know your appraised values until you tell them. Each brokerage, bank, or transfer agent has its own paperwork, but most require a certified death certificate, letters testamentary or letters of administration proving the executor’s authority, and their own transfer or re-registration forms. Brokerages often also want an affidavit of domicile and a medallion signature guarantee.
Once processed, the institution retitles the account or creates a new one in the beneficiary’s name and updates the cost basis in its system. Ask for written confirmation showing the new basis. This matters because at sale, the brokerage reports basis to the IRS on Form 1099-B, and if their file still shows the original owner’s purchase price, you’ll be reconciling that on your return.12Internal Revenue Service. Instructions for Form 1099-B (2026)
Transfer-on-death accounts move outside probate. You submit a death certificate and re-registration application straight to the transfer agent, with no court documents needed, and the step-up still applies.13Investor.gov. Transferring Assets
If You Received a Schedule A From Form 8971
Estates required to file a federal estate tax return — which in 2026 means estates above $15,000,000 — must also file Form 8971 and give each beneficiary a Schedule A listing the value assigned to the property they received.14Internal Revenue Service. Instructions for Form 8971 and Schedule A15Internal Revenue Service. What’s New – Estate and Gift Tax If you got one, the value on your Schedule A is your basis. Reporting a higher basis at sale triggers a 20% accuracy-related penalty on any resulting underpayment.16eCFR. 26 CFR 1.6662-9 – Inconsistent Estate Basis Reporting
Most estates fall below the filing threshold and no Schedule A is issued. Your basis is still the fair market value at death, and per IRS Publication 551 you can determine it using the appraised value established for state inheritance or transfer tax purposes.17Internal Revenue Service. Publication 551, Basis of Assets
Report the Sale on Form 8949 and Schedule D
The step-up only shows up on your tax return when you sell. Report the sale on Form 8949, which feeds Schedule D of your Form 1040.18Internal Revenue Service. Instructions for Form 8949 – Sales and Other Dispositions of Capital Assets A few line-item details are specific to inherited property.
In the Date Acquired column, enter “INHERITED” instead of a calendar date. That tells the IRS the inherited-property holding rules apply. In the Cost or Other Basis column, enter the stepped-up fair market value, not the original owner’s purchase price and not whatever number appears on a 1099-B that hasn’t been updated.18Internal Revenue Service. Instructions for Form 8949 – Sales and Other Dispositions of Capital Assets
Inherited property is treated as long-term regardless of how long you actually held it. Under Section 1223(9), property acquired from a decedent with a basis determined under Section 1014 is considered held more than one year automatically.19Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property Report the sale in Part II of Form 8949 (the long-term section). Long-term capital gains are taxed at 0%, 15%, or 20% depending on your income.
If the 1099-B shows a basis that doesn’t match your stepped-up value, report the correct basis on Form 8949 and use the adjustment column to reconcile. Keep the appraisal reports, the death certificate, any Schedule A, and the brokerage confirmation of the new basis. Those are the records that back up your reported number if the IRS asks why it doesn’t match what the broker sent them.