The step-up in basis is the federal tax rule that resets an inherited asset’s cost basis to its fair market value on the date the owner died, replacing whatever the deceased originally paid.1Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent The practical effect is dramatic. If your parent bought stock for $5,000 and it was worth $200,000 the day they died, your basis becomes $200,000. Sell it the next day at that price and you owe zero capital gains tax on the $195,000 of appreciation that built up during their lifetime.
How the Reset Works
Basis is your starting point for calculating gain or loss when you sell. For property you buy, basis is what you paid plus improvements.2Internal Revenue Service. Publication 551, Basis of Assets For property you inherit, the original cost stops mattering. Federal law substitutes the fair market value on the date of death.3Internal Revenue Service. Gifts and Inheritances
The name reflects the usual direction of the adjustment. Most assets appreciate, so the new basis is typically higher than what the deceased paid. The rule runs both ways, though. If an asset lost value during the owner’s lifetime, the heir takes a stepped-down basis to the lower date-of-death value, and the pre-death decline cannot be claimed as a loss.
What Qualifies and What Doesn’t
The step-up applies only to property acquired from someone who died. Several common situations look similar but follow different rules.
Lifetime Gifts
Property received as a gift during the owner’s life carries over the giver’s original basis.4Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust Stock your father bought for $10,000 and gave you when it was worth $100,000 keeps its $10,000 basis in your hands. Sell for $100,000 and you owe tax on the full $90,000. Had he held that stock until death, your basis would have been $100,000 and the gain would have been wiped out. That gap is why advisors often discourage elderly parents from gifting appreciated stock or real estate to children while alive.
The One-Year Gift-Back Rule
Congress blocked one obvious workaround. If you give appreciated property to someone who dies within a year and the property passes back to you or your spouse, you do not get a step-up. Your basis stays at whatever the deceased’s adjusted basis was right before death.5Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent – Section 1014(e) The rule only catches property returning to the original donor or the donor’s spouse; if the deceased leaves it to a third party, the normal step-up applies for that person.
Income in Respect of a Decedent
Some inherited assets never get a step-up. These are items the deceased had earned or was entitled to but had not yet been taxed on. The IRS calls this Income in Respect of a Decedent, and it includes:6Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators
- Traditional IRAs, 401(k) plans, 403(b) accounts, and similar tax-deferred retirement accounts.
- Non-qualified annuity earnings that accumulated tax-deferred.
- U.S. savings bond interest that was never reported.
- Unpaid wages, commissions, or bonuses owed at death.
The beneficiary pays ordinary income tax on these distributions, the same way the original owner would have. Granting a step-up would let untaxed income escape tax entirely.
Irrevocable Grantor Trusts
Assets in a revocable (living) trust receive a full step-up at the grantor’s death, because the grantor could have revoked the trust at any time.7Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent – Section 1014(b)(2) Irrevocable grantor trusts are different. In Revenue Ruling 2023-2, the IRS confirmed that assets in an irrevocable grantor trust do not get a step-up when they are not included in the grantor’s taxable estate.8Internal Revenue Service. Internal Revenue Bulletin 2023-16, Revenue Ruling 2023-2 Beneficiaries take the grantor’s original basis, as they would with a lifetime gift. Either the asset stays in the estate and qualifies for the step-up, or it leaves through an irrevocable trust and keeps its old basis.
How Much of the Asset Gets Stepped Up
Ownership structure and, for married couples, state law determine whether the whole asset or only part of it receives a new basis.
Joint Tenancy Between Spouses
When spouses hold property as joint tenants with right of survivorship, only the deceased spouse’s half is included in the gross estate.9Office of the Law Revision Counsel. 26 U.S. Code 2040 – Joint Interests – Section 2040(b) Only that half receives a step-up. The surviving spouse keeps their original basis on their own half.
Joint Tenancy Between Non-Spouses
For non-spouse joint tenants, the entire property is presumed to belong to the deceased’s estate unless the surviving owner can prove their own contribution to the purchase.10Office of the Law Revision Counsel. 26 U.S. Code 2040 – Joint Interests – Section 2040(a) Whatever share the surviving owner cannot document as their own contribution is included in the estate, and only that portion is stepped up.
Community Property States
Married couples in community property states get a much larger adjustment. When one spouse dies, both halves of community property, including the survivor’s share, receive a full step-up to fair market value.11Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent – Section 1014(b)(6) The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.12Internal Revenue Service. Publication 555 (12/2024), Community Property On a $2 million home originally bought for $400,000, the difference between a 50% step-up and a 100% step-up shelters an extra $800,000 of appreciation from capital gains tax.
Setting the Fair Market Value
The stepped-up basis is only as good as the number you assign to it, so the valuation method matters.
For publicly traded stocks, bonds, and mutual funds, fair market value is the closing price on the date of death, or the average of the high and low trading prices for that day.3Internal Revenue Service. Gifts and Inheritances Brokerage firms usually calculate this automatically.
For real estate, closely held businesses, art, and collectibles, you need a professional appraisal. The IRS expects the appraiser to hold a recognized professional designation or meet education and experience requirements, regularly perform appraisals for compensation, and demonstrate specific expertise in the type of property being valued.13Internal Revenue Service. Guidance Regarding Appraisal Requirements for Noncash Charitable Contributions A standard single-family home appraisal typically runs a few hundred dollars to over $1,000. Unusual or high-value properties cost more.
Alternate Valuation Date
The executor can elect to value all estate assets six months after the date of death instead of on the date of death.14Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation The IRS only permits this election when it both reduces the total estate value and reduces the estate tax owed. The choice is all-or-nothing across the estate, any asset sold or distributed during those six months is valued as of the date it left the estate, and once made on Form 706, the election is permanent.
What You Owe When You Sell
A step-up eliminates gain built up during the owner’s lifetime, but it does not shield appreciation that occurs after the date of death. If the asset keeps rising in value before you sell, that later gain is taxable.
Inherited property always qualifies for long-term capital gains treatment, no matter how briefly you hold it.15Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property – Section 1223(9) Sell the day after inheriting and any gain is still taxed at long-term rates. For 2026, those federal rates are:
- 0% for taxable income below roughly $49,450 (single) or $98,900 (married filing jointly).
- 15% for taxable income up to about $545,500 (single) or $613,700 (married filing jointly).
- 20% above those thresholds.
Higher-income heirs also face the 3.8% net investment income tax on capital gains once modified adjusted gross income tops $200,000 for single filers or $250,000 for joint filers.16Internal Revenue Service. Topic No. 559, Net Investment Income Tax Combined, that can push the top federal rate on inherited-asset gains to 23.8%, before any state income tax.
Rental and Business Property
For property that was rented out or used in a business, the step-up carries an added benefit. Depreciation deductions the original owner claimed would normally trigger depreciation recapture tax if the property were sold, at rates up to 25%. Inheriting the property zeroes out that recapture liability. You also start a fresh depreciation schedule based on the stepped-up value. If a rental house is worth $400,000 at death, you depreciate from $400,000 (less allocated land value), regardless of what the original owner paid or claimed. Larger annual deductions follow.
Documenting Your Basis
Whether or not the estate files a federal return, you are the one who has to prove your basis when you sell. How you do that depends on the size of the estate.
When the Estate Files Form 706
A federal estate tax return is required in 2026 when the gross estate exceeds $15,000,000.17Internal Revenue Service. What’s New — Estate and Gift Tax When Form 706 is filed, the executor must also file Form 8971 with the IRS within 30 days of the estate tax return’s due date or filing date, whichever is earlier, and send each beneficiary a Schedule A listing the property they inherited and its reported basis. If a valuation later changes through audit, settlement, or court determination, the executor files a supplemental Form 8971 and updated Schedule A within 30 days of the final value.18Internal Revenue Service. Instructions for Form 8971 and Schedule A
Beneficiaries must use the basis on Schedule A when they file their own returns. Reporting a higher basis, if it reduces tax, triggers an automatic 20% accuracy-related penalty on the underpayment caused by the inconsistency.19eCFR. 26 CFR 1.6662-9 – Inconsistent Estate Basis Reporting Save every version of Schedule A you receive. It is the document that proves your basis years later.
When the Estate Is Below the Threshold
Most estates fall well under $15 million and file no Form 706, so no Schedule A is ever generated. The consistency penalty does not apply, but you still need to establish your basis. Get a written appraisal for real estate or other hard-to-value assets as close to the date of death as possible, and save brokerage statements showing security prices on that date. Without contemporaneous documentation, proving your basis when you sell years later becomes difficult.
Some states also impose their own estate or inheritance taxes at thresholds far below the federal one. An estate that owes nothing to the IRS may still owe tax to the state where the deceased lived or where the property sits.