What Is a Tax Step-Up in Basis: Heirs, Gifts, and Spouses

A tax step-up in basis is a rule that resets the taxable value of inherited property to its fair market value on the date the previous owner died, replacing whatever that person originally paid for it. If a parent bought stock for $50,000 and it was worth $500,000 at death, the heir’s starting basis is $500,000, not $50,000. Decades of built-in gains are wiped off the tax ledger, and the heir only owes capital gains tax on appreciation that happens after the inheritance.

How the Reset Works

Every asset you own has a cost basis, which is what you paid for it. When you sell, the IRS taxes the difference between the sale price and that basis. Your basis normally stays locked at the original purchase price for as long as you own the asset.

Death changes that. Under Section 1014 of the Internal Revenue Code, anyone who inherits property gets a new basis equal to the asset’s fair market value on the date of the owner’s death.¹ All the appreciation that built up during the previous owner’s lifetime disappears from the tax picture. The heir starts fresh.

The practical impact is large. Suppose your grandmother bought a rental property in 1985 for $80,000, and it’s worth $450,000 when she dies. Without the step-up, selling would trigger tax on roughly $370,000 in gain. With the step-up, your basis resets to $450,000. Sell for $460,000 and the IRS only sees $10,000 in taxable gain.

Which Assets Qualify

Most capital assets get the step-up. Real estate, individual stocks, bonds, mutual fund shares, business interests, fine art, and collectibles all qualify.¹ The common thread is that these are assets whose appreciation would normally be taxed when sold.

Retirement accounts are the biggest exception. Traditional IRAs, 401(k) plans, and other tax-deferred accounts do not get a step-up because the money inside them was never taxed in the first place. The IRS treats these as income in respect of a decedent, meaning the heir owes ordinary income tax on withdrawals, just as the original owner would have.² Roth IRAs work differently because qualified distributions are already tax-free, and no step-up is needed.

When the Reset Goes the Wrong Way

Section 1014 sets basis at fair market value, period. That cuts both ways. If the deceased bought stock for $100,000 and it was worth only $40,000 at death, the heir’s basis is $40,000, not the original $100,000.¹ The $60,000 loss is gone. The heir can’t claim it, and neither can the estate.

That’s why holders of significantly depreciated assets sometimes sell before death. Selling during life lets someone recognize the loss and offset other gains. Once the owner dies still holding the asset, that tax benefit vanishes permanently.

How Fair Market Value Is Determined

The whole step-up depends on accurately pinning down what the asset was worth on the date of death. The method varies by asset.

For publicly traded stocks and bonds, the IRS uses the average of the highest and lowest quoted selling prices on the date of death.³ If death fell on a weekend or holiday, the regulation calls for a weighted average of the nearest trading days. Grabbing the closing price is a common mistake.

Real estate, closely held businesses, art, and other unique property require professional appraisals. The appraiser produces a written report documenting value as of the specific date of death. Real estate appraisals typically run from a few hundred to over a thousand dollars depending on complexity. It’s worth doing this promptly rather than trying to reconstruct a valuation years later during an audit.

The Alternate Valuation Date

If the estate’s value drops after death, the executor can elect to value everything six months after the date of death instead. Section 2032 permits this election, but only when it reduces both the estate’s total value and the combined estate and generation-skipping transfer taxes owed.⁴ Assets sold or distributed during that six-month window are valued on the date of sale or distribution instead.

There’s a catch. Choosing the alternate date also lowers the heir’s stepped-up basis. The estate pays less estate tax, but the heir inherits a lower basis and may owe more in capital gains tax later.

What the Heir Pays on Sale

When an heir sells inherited property, only appreciation since the date of death is taxable. Inherit property worth $500,000, sell for $550,000, and the taxable gain is $50,000.

Inherited property also gets an automatic long-term holding period, no matter how quickly the heir sells. Under Section 1223, if your basis is determined under Section 1014 and you sell within one year of the decedent’s death, you are treated as having held the property for more than one year.⁵ You qualify for the lower long-term capital gains rates even if you sell the day after inheriting.

For 2026, the long-term capital gains rates are:

0 percent on taxable income up to $49,450 for single filers or $98,900 for married couples filing jointly.
15 percent on taxable income above those thresholds up to $545,500 for single filers or $613,700 for joint filers.
20 percent on taxable income above the 15 percent ceiling.⁶

Higher-income heirs face an additional 3.8 percent net investment income tax on gains if adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).⁷ That surtax can push the effective rate on inherited-property gains to 23.8 percent at the top end.

Gifts Are Not the Same as Inheritances

The step-up only applies to property received from someone who has died. Property received as a gift during the donor’s lifetime is treated completely differently. Under Section 1015, a gift recipient takes the donor’s original basis — whatever the donor paid — rather than the current market value.⁸ This is called carryover basis, and it means the built-in gain travels with the asset.

The difference can be enormous. A parent owns stock with a $20,000 basis, now worth $500,000. Gift it during life, and the child’s basis is $20,000; selling triggers tax on $480,000. Hold the stock until death, and the child inherits it with a $500,000 basis and owes nothing on the prior appreciation. Same stock, same family, dramatically different tax outcome.

There is one wrinkle for gifted property that has lost value. If fair market value at the time of the gift is below the donor’s basis, a split basis applies: the donor’s basis governs for measuring gains, and the lower fair market value governs for measuring losses.⁸ Sell somewhere between those two numbers and no gain or loss is recognized at all.

The One-Year Gift-Back Rule

Congress anticipated that people might try to game the step-up by gifting appreciated property to a dying relative, then inheriting it back with a fresh basis. Section 1014(e) shuts this down. If you give appreciated property to someone who dies within one year, and that property comes back to you or your spouse, the step-up is denied. Your basis reverts to the decedent’s adjusted basis immediately before death, which is your original carryover basis from the gift.¹

The rule only blocks the step-up when the property returns to the original donor or their spouse. If the dying person leaves the gifted asset to someone else, that third party still gets the stepped-up basis.

Rules for Surviving Spouses

How much of a married couple’s property gets a step-up depends on where they live. The nine community property states treat most assets acquired during the marriage as equally owned by both spouses.⁹ When one spouse dies, the entire asset — both halves — receives a step-up under Section 1014(b)(6). This double step-up resets the surviving spouse’s half too, even though they are still alive.

In common law property states, only the deceased spouse’s share of jointly owned property receives the step-up. The surviving spouse keeps their original basis on their own half. If a couple jointly owned stock they bought for $100,000 total and it’s worth $200,000 when one spouse dies, the survivor’s new combined basis is $150,000: $50,000 for their original half, plus $100,000 for the deceased spouse’s stepped-up half. In a community property state, the full $200,000 becomes the new basis.¹

Trust Assets

Whether trust assets get a step-up depends on whether they’re included in the deceased person’s gross estate for estate tax purposes. If the IRS counts it as part of the estate, it qualifies. If not, it doesn’t.

Assets in a revocable living trust get the step-up. Section 1014(b) specifically lists property transferred to a trust the decedent could revoke as property acquired from a decedent.¹ Because the grantor kept full control during life, the trust assets stay in the gross estate and receive the same reset as property passing through a will.

Irrevocable trusts are different. When someone transfers assets to an irrevocable trust and gives up control, those assets are generally removed from the gross estate. That’s the point for estate tax planning, but it also means no step-up at death. The assets keep their original basis inside the trust. If the grantor retained certain rights (such as the right to receive income from the trust), the IRS may pull the assets back into the gross estate under Section 2036, which restores step-up eligibility. Some estate plans intentionally structure irrevocable trusts to trigger inclusion for exactly this reason, trading estate tax protection for a basis reset.

Documentation to Keep

Even if the estate is small enough that no federal estate tax return is required, heirs should hold onto documentation of the asset’s fair market value at the date of death. Historical stock prices are easy to look up years later. Real estate appraisals and valuations of closely held businesses are not. Getting that documentation while the numbers are fresh is far cheaper than reconstructing it during an audit down the road.

One related rule matters regardless of estate size. Section 1014(f) says an heir’s basis in inherited property cannot exceed the value reported on the estate tax return, if one was filed. If the executor undervalued an asset on Form 706, the heir is stuck with that lower number. It’s worth asking the executor for a copy of what was reported before signing off on any sale.

1
Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
2
Internal Revenue Service. Gifts and Inheritances
3
eCFR. 26 CFR 20.2031-2 – Valuation of Stocks and Bonds
4
Office of the Law Revision Counsel. 26 U.S. Code 2032 – Alternate Valuation
5
Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property
6
Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
7
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
8
Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
9
Internal Revenue Service. Publication 555, Community Property