Effective step-up in basis planning strategies come down to a handful of decisions made well before death: hold appreciated property instead of gifting it, sell depreciated property while you’re alive, title assets to capture the largest possible basis reset (especially between spouses), and choose trust structures that keep the property inside your taxable estate when you want the step-up to apply. Get those right and heirs can inherit highly appreciated stock, real estate, or a family business and sell it with little or no capital gains tax.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Get them wrong and the family pays tax on decades of gain that federal law would otherwise erase.
The Rule You’re Planning Around
Basis is essentially what you paid for an asset, and it sets the taxable gain when you sell. Buy a rental for $200,000, sell it for $600,000, and you owe capital gains tax on the $400,000 difference. Hold it until death and your heirs take it with a basis equal to fair market value on the date you die.2Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent If they sell for $600,000, they report no gain.
The reset covers most property that passes through an estate: real estate, stocks, mutual fund shares, business interests, and other capital assets. It does not apply to tax-deferred retirement accounts like IRAs and 401(k)s, because distributions from those accounts are taxed as ordinary income regardless of basis. That boundary matters. Planning for those accounts follows a different set of rules, and treating a traditional IRA as if it will get a step-up at death is a common and expensive mistake.
Hold Appreciated Assets, Give Cash Instead
The single most valuable planning move is refusing to give appreciated property away during your lifetime. A lifetime gift carries a “carryover basis”: the recipient inherits your original cost.3Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust Give a child stock you bought for $10,000 that’s now worth $100,000, and their basis is $10,000. When they sell, they owe capital gains tax on $90,000.
Hold the same stock until death and your child inherits it at $100,000 with no taxable gain on a sale at that price. At a 15% long-term capital gains rate, that’s $13,500 in tax savings on one modest position. At 20% it’s $18,000, and the 3.8% net investment income tax can push the combined rate to 23.8% for higher-income heirs.4Internal Revenue Service. Net Investment Income Tax
The rule of thumb writes itself. The more an asset has appreciated, the stronger the case for holding. If you’re choosing between gifting cash and gifting appreciated stock, give the cash and keep the stock in your estate.
Harvest Losses While You’re Alive
The basis rule cuts both ways. An asset that has lost value gets stepped down to its lower fair market value at death, and the built-in loss disappears permanently because no one ever claimed it. Bought stock for $50,000, worth $20,000 at death: your heir’s basis is $20,000 and the $30,000 loss is gone.2Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
Sell depreciated positions instead. A realized loss can offset capital gains taken that year, and if losses exceed gains, up to $3,000 of the excess can be deducted against ordinary income each year, with the remainder carrying forward indefinitely. Proceeds can be reinvested in similar (though not substantially identical) holdings to keep the portfolio’s allocation intact. Losses are worth more to you alive than dead; gains are worth less.
The One-Year Gift-Back Trap
One aggressive move the tax code specifically blocks: gifting appreciated property to a terminally ill relative to get it back with a fresh basis. If you give appreciated property to someone who dies within one year and it passes back to you or your spouse, no step-up applies. The basis stays at whatever it was in the decedent’s hands immediately before death, which is your original carryover basis.5Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent – Section 1014(e)
The rule is narrow. It only fires when the property circles back to the original donor or their spouse. Gift stock to a parent who dies within a year and leaves it to your child instead of you, and the step-up applies normally. Worth knowing before you assume otherwise, because the penalty for tripping this rule is losing the gift and getting no basis benefit.
Title Property to Capture More Basis
How assets are titled controls how much of them receives a new basis when one owner dies. A decision made casually at closing years ago can cost a surviving spouse real money.
Joint Tenancy Between Spouses
When spouses hold property as joint tenants with right of survivorship, half of the property’s value is included in the estate of the first spouse to die.6Office of the Law Revision Counsel. 26 USC 2040 – Joint Interests Only that half gets stepped up. The survivor’s half keeps its original basis. If a couple bought a home for $200,000 that’s worth $800,000 when one spouse dies, the survivor’s blended basis is $500,000: $100,000 for their original half plus $400,000 for the stepped-up half. A sale at $800,000 produces $300,000 of gain, part of which the home sale exclusion may shelter, though not necessarily all.
Community Property
Spouses in the nine community property states get a much better result. Those states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.7Internal Revenue Service. Publication 555 – Community Property When one spouse dies, both halves of the community property receive a step-up to fair market value, not just the decedent’s half.8Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent – Section 1014(b)(6) Same home, same numbers: the survivor’s basis in the entire property is $800,000, and a sale at that price produces zero gain.
This double step-up is one of the most valuable and least understood benefits in the tax code. For couples with highly appreciated real estate or investment portfolios, the difference between joint tenancy and community property titling can be hundreds of thousands of dollars. Some community property states let married couples opt into community property treatment through community property trusts or agreements, even for assets that would otherwise be separate. Couples in non-community-property states don’t get that treatment under federal law by default, though a handful of states have adopted optional community property trust statutes in recent years.
Choose the Right Trust
Not every trust preserves the step-up. The controlling question is whether the trust assets are included in the grantor’s taxable estate at death. If they are, the basis resets. If they aren’t, it usually doesn’t.
Revocable Living Trusts
A revocable living trust preserves the step-up. Because the grantor keeps the power to change or revoke the trust, the IRS treats the trust assets as part of the grantor’s gross estate.9Office of the Law Revision Counsel. 26 USC 2038 – Revocable Transfers That estate inclusion triggers the basis reset. Families whose main goal is avoiding probate while still getting the step-up can accomplish both with this structure.
Irrevocable Trusts
Irrevocable trusts are different. Transfer property to an irrevocable trust and give up the power to take it back, and the property generally leaves your taxable estate. No inclusion, no step-up. In 2023, the IRS confirmed this in Revenue Ruling 2023-2, which addressed irrevocable grantor trusts specifically. Under that structure the grantor pays income tax on the trust’s earnings but doesn’t include the assets in the estate, and the ruling made clear that the trust assets don’t get a step-up at the grantor’s death even though the grantor is treated as owner for income tax purposes.
That creates a genuine planning tension. Irrevocable trusts are powerful for removing assets from an estate to reduce estate tax exposure, but the trade-off is losing the step-up. For families below the estate tax exemption, an irrevocable trust may produce a worse overall tax result than a revocable trust that lets assets pass through the estate with a stepped-up basis. Irrevocable trusts make more sense when the estate tax savings outweigh the lost step-up, which typically means very large estates.
The Alternate Valuation Date
Basis normally uses fair market value on the exact date of death, but an executor can elect to value the entire estate six months later.10Office of the Law Revision Counsel. 26 US Code 2032 – Alternate Valuation The election exists mainly to help estates when values drop after death, as can happen with volatile portfolios or falling real estate markets.
Two limits apply. The election is only available if it reduces both the gross estate value and the total estate tax liability, so cherry-picking isn’t allowed. And any property the estate sells, distributes, or otherwise disposes of during the six-month window is valued as of the disposition date rather than the six-month mark. The executor makes the election on the estate tax return, and once made it’s irrevocable. If the return is filed more than a year after the deadline (including extensions), the election is off the table.
When the election applies, the heir’s basis matches the alternate valuation date value rather than the date-of-death value.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Lower estate tax, lower basis for the heir. Run the numbers both ways before deciding, because a heir who plans to sell soon may lose more in capital gains than the estate saves.
Don’t Skip the Portability Election
Basis planning sits next to a separate but related decision about the estate tax exemption itself. The step-up applies regardless of whether estate tax is owed, but for larger estates the portability election protects the surviving spouse’s future exemption.
For 2026, the basic exclusion amount is $15,000,000 per person.11Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A married couple can shelter up to $30,000,000 combined, but using the second spouse’s exemption requires a portability election on Form 706 after the first death, even when no estate tax is owed.12Internal Revenue Service. Frequently Asked Questions on Estate Taxes The return is due nine months after death, with an automatic six-month extension available by filing Form 4768.
Skipping this election is one of the costliest mistakes in estate planning. If the first spouse dies with a $15 million unused exemption and the survivor doesn’t file to claim it, the exemption is gone. The surviving spouse is left with only their own $15 million, which for a combined estate above that number can mean millions in unnecessary estate tax.
Document the Values, File the Right Forms
Claiming a stepped-up basis takes proof. The IRS won’t accept a claimed value on faith, and neither will a closing agent or a brokerage cost-basis system.
Real estate needs a formal appraisal from a qualified professional, performed as close to the date of death as possible. Business interests, artwork, and collectibles may need specialized appraisals. Keep the original purchase records too. Executors are sometimes asked to substantiate the prior basis to verify the claimed step-up, so gather closing statements, brokerage confirmations, and records of capital improvements during the decedent’s ownership.
When an estate is required to file Form 706, the executor must also file Form 8971 and provide each beneficiary a Schedule A showing the estate tax value of the property they received.13Internal Revenue Service. About Form 8971 – Information Regarding Beneficiaries Acquiring Property From a Decedent Values on Schedule A must match those reported on Form 706, and the beneficiary must use a basis consistent with that reported value. Estates filing Form 706 solely to elect portability, or only to handle generation-skipping transfer tax matters, are exempt from the Form 8971 requirement.14Internal Revenue Service. Instructions for Form 8971 and Schedule A Beneficiaries should keep their Schedule A permanently. It’s their proof of basis when they eventually sell, which may be years or decades later.
What Overstating Basis Costs
The IRS treats basis consistency as a real enforcement priority. If a beneficiary claims a basis higher than the value reported on the estate tax return, a 20% accuracy-related penalty applies to the resulting tax underpayment, and “inconsistent estate basis” is a specifically listed trigger.15Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments Substantial valuation misstatements, where the claimed basis exceeds 150% of the correct amount, draw the same 20% penalty. Gross misstatements exceeding 200% of the correct value escalate to 40%.
For high-value assets like real estate, closely held businesses, or art collections, a credentialed appraiser is cheap insurance. Getting the number right the first time costs a few thousand dollars. Defending an inflated basis in an audit costs much more.