A step-up in basis is the tax rule that resets an inherited asset’s cost basis to its fair market value on the date the previous owner died, rather than the price the owner originally paid. For an heir, this means capital gains tax on decades of appreciation during the decedent’s lifetime disappears. Sell the asset right after inheriting it at the date-of-death value, and the taxable gain is zero. The rule lives in Internal Revenue Code Section 1014 and covers most kinds of property, with a few important exceptions.
How the Reset Works
Every asset carries a “basis” for tax purposes: generally what the owner paid, plus improvements, minus depreciation. When the owner dies, that number is thrown out. The heir’s new basis is the asset’s fair market value on the date of death.
Take a house bought for $200,000 with $50,000 in renovations, held until the owner’s death when it was worth $900,000. The heir does not inherit the $250,000 adjusted basis. The heir’s basis is $900,000. Selling for $900,000 produces no taxable gain. Without the step-up, that same heir would owe capital gains tax on $650,000 of growth.
The dollars at stake follow from the 2026 long-term capital gains brackets: 0%, 15%, or 20% depending on taxable income. Single filers pay 0% up to $49,450, 15% from $49,450 to $545,500, and 20% above that. For married couples filing jointly, the 15% bracket runs from $98,900 to $613,700, with 20% kicking in above $613,700. On $650,000 of gains, a 15% rate would mean roughly $97,500 in tax. The step-up erases it.
What Qualifies and What Doesn’t
Section 1014 sweeps in most property that passes through an estate: real estate, publicly traded stocks, mutual funds, corporate bonds, and ETFs. Tangible personal property such as art, jewelry, and collectibles qualifies. Cryptocurrency and other digital assets also receive a step-up, because the IRS treats virtual currency as property for federal tax purposes.1Internal Revenue Service. Notice 2014-21
Retirement accounts are the major exception. Traditional IRAs, 401(k) plans, and similar tax-deferred accounts do not step up, because the money inside them was never taxed. They pass as “income in respect of a decedent,” and beneficiaries pay ordinary income tax on distributions just as the original owner would have. Roth IRAs are treated differently: qualified distributions from an inherited Roth are tax-free, though non-qualified distributions can include taxable earnings.2Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators
When Basis Steps Down Instead
The adjustment moves in both directions. If an asset is worth less at death than what the owner paid, the heir’s basis is the lower fair market value, not the higher purchase price. That is a step-down, and the heir inherits a built-in loss they cannot deduct.3Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Stock purchased for $100,000 and worth $60,000 at death gives the heir a basis of $60,000. A sale at $60,000 yields no deductible loss. Had the original owner sold before dying, that $40,000 loss could have offset other gains. For heavily depreciated holdings, selling during life often produces a better tax result than passing them on.
Inherited Property Versus Lifetime Gifts
Receiving the same asset as a gift while the owner is alive is far worse tax-wise. Gifts carry the donor’s original basis over to the recipient, under Section 1015.4Office of the Law Revision Counsel. 26 U.S. Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust A parent who bought stock for $10,000 now worth $200,000 can hand it over as a gift, and the child takes the $10,000 basis along with a future tax bill on $190,000 of growth. Let the same stock pass through the estate, and the child’s basis is $200,000. The prior appreciation goes untaxed.
Section 1014(e) blocks the obvious workaround. If you gift appreciated property to someone who dies within one year, and it comes back to you or your spouse, the step-up does not apply. You keep the basis you started with.5Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
Automatic Long-Term Treatment on Sale
Capital gains on assets held more than a year qualify for lower long-term rates. Inherited property is treated as long-term automatically, no matter how quickly the heir sells. Section 1223(9) provides this rule: sell the day after inheriting, and the gain or loss is still long-term.6Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property An heir who inherits appreciated stock and sells right away pays the 0%, 15%, or 20% long-term rate rather than ordinary income rates that can reach 37%. With the stepped-up basis on top, the tax on a quick sale is often nothing.
Setting the Date-of-Death Value
The step-up is only as good as the valuation behind it. Different assets call for different methods.
Real estate and closely held businesses generally require a professional appraisal keyed to the date of death, taking comparable sales, market conditions, and property characteristics into account.
Publicly traded stocks and bonds are valued at the mean between the highest and lowest quoted selling prices on the date of death.7eCFR. 26 CFR 20.2031-2 – Valuation of Stocks and Bonds
The Alternate Valuation Date
Under Section 2032, an executor can elect to value the entire estate six months after the date of death instead. The election is only available if it decreases both the gross estate value and the total estate tax owed.8Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation It applies to everything in the estate. You cannot pick some assets at the date-of-death value and others six months out. Property sold or distributed before the six-month mark is valued as of the distribution date.9eCFR. 26 CFR 20.2032-1 – Alternate Valuation
The tradeoff matters for heirs. Choosing the alternate date lowers the stepped-up basis to the lower six-month value. The estate saves on estate tax, but the heir may owe more capital gains tax on a later sale.
Jointly Owned and Community Property
How much of an asset gets a step-up depends on how it is titled and where the couple lives.
In common law states, only the decedent’s share of jointly owned property is adjusted. For a couple owning an asset 50/50 with right of survivorship, only the decedent’s half steps up. The survivor keeps their original basis on the other half. A home bought for $400,000 and worth $1 million at the first spouse’s death gives the survivor a blended basis of $700,000: $200,000 for their original half plus $500,000 for the stepped-up half. A sale at $1 million produces $300,000 of taxable gain.
Community property states go further. Under Section 1014(b)(6), when at least half of community property is included in the decedent’s gross estate, the entire asset — both halves — steps up to fair market value.5Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent Applied to that same home, the survivor’s basis becomes $1 million, and a sale at that price triggers no capital gains tax.10Internal Revenue Service. Publication 555 (12/2024), Community Property
Reporting and the Consistency Rule
Executors of estates that file a federal estate tax return (Form 706) must also file Form 8971, with a Schedule A for each beneficiary receiving property. Form 8971 reports the fair market value assigned to each asset and identifies who received it.11Internal Revenue Service. About Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent The filing window is tight: Form 8971 goes to the IRS, and each Schedule A to the corresponding beneficiary, no later than 30 days after the estate tax return is filed or 30 days after its due date (including extensions), whichever comes first.12Internal Revenue Service. Instructions for Form 8971 and Schedule A
Section 6035 imposes a strict consistency requirement. The basis a beneficiary claims when selling inherited property must match the value the estate reported.13Office of the Law Revision Counsel. 26 U.S. Code 6035 – Basis Information to Persons Acquiring Property From Decedent Claim a higher basis than the estate reported and you create an “inconsistent estate basis” under Section 6662, triggering a 20% accuracy-related penalty on the resulting underpayment.14Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty
The 2026 Estate Tax Exemption
The step-up applies whether or not the estate owes any estate tax, but the exemption threshold controls whether Form 706 and Form 8971 come into play. For 2026, the federal estate and gift tax exemption is $15,000,000 per person, or $30,000,000 for a married couple. That is up from the 2025 exemption of $13,990,000, after legislation prevented the previously scheduled reduction to roughly $7,000,000.
Estates below the threshold do not file Form 706, so the Form 8971 reporting requirement is not triggered. For most families the step-up simply applies. The heir uses the date-of-death fair market value as basis when eventually selling. Documentation still matters: appraisals, brokerage statements, property records. The IRS will not chase Form 8971 on a small estate, but it will ask for proof of basis if a high one shows up on a future sale.