What is step-up in basis?

A short note before you start

This guide is general information for the United States, not legal, tax, financial or medical advice.

What is step-up in basis?

Step-up in basis is the rule that resets the tax basis of most inherited property to its fair market value on the date the previous owner died, instead of carrying over what that person paid. Under 26 U.S.C. Section 1014(a), the basis of property acquired from a decedent is generally "the fair market value of the property at the date of the decedent's death"¹.

If a parent bought a house for $80,000 decades ago and it is worth $450,000 at death, the heir's basis becomes $450,000.

What is a step-up in basis, in one sentence?

A reset of an inherited asset's cost basis to its value on the date the owner died, so future capital gains tax is measured from that new number, not the original purchase price.

How does step-up in basis work?

The step-up applies automatically to property owned by the decedent and counted in their estate, whether or not the estate owes federal estate tax⁴. Nothing needs to be filed: the date-of-death value becomes the heir's new basis, and only later appreciation is taxable.

The alternate valuation date

An executor can instead value the whole estate six months after death, but only if that lowers both the gross estate value and the estate tax bill, and it applies to every asset, not one at a time⁷. Most estates skip it.

Special-use valuation for farms and businesses

Real property used in farming or a closely held business can be valued at its actual use rather than its highest potential value under special-use valuation; that lower value becomes the heir's basis⁴.

The basis consistency requirement for large estates

When an estate files Form 706, a beneficiary cannot claim a basis higher than the estate tax value the executor reports for that property, under 26 U.S.C. Section 1014(f)¹. Reporting a higher basis risks a 20% accuracy-related penalty under 26 U.S.C. Section 6662, or 40% for a gross overstatement⁹.

Does basis ever step down instead of up?

Yes. The same date-of-death rule applies whichever way values moved: Publication 551 resets the basis of inherited property to its fair market value on the date of the decedent's death, with no exception for lost value⁴. If a parent bought stock for $50,000 and it is worth only $30,000 when they die, the heir's basis is $30,000, not $50,000, and that $20,000 loss is not deductible by the estate or the heir⁴.

What assets get a step-up in basis, and what doesn't?

Most property a person owns outright and leaves behind qualifies. Some account types are excluded, since they were never taxed on a capital-gains basis.

Retirement accounts and annuities are excluded because withdrawals were always taxed as ordinary income⁴. This is also why an inherited IRA follows its own withdrawal rules; see rules for an inherited IRA RMD.

The one-year gift-back exception

Step-up does not apply if the decedent received the appreciated property as a gift from you, or your spouse, within one year before death, and it passes back to you or your spouse at death. Your basis then carries over from the decedent instead of stepping up (IRS, Publication 551, checked 2026-09-21; 26 U.S.C. Section 1014(e), Cornell Law School, checked 2026-09-21).

Step-up in basis on inherited property: real estate specifics

For a house, the stepped-up basis is its fair market value on the date of death, usually set with an appraisal or comparative market analysis. Keep the appraisal and any later closing statement: improvements the decedent made before death are already reflected in that value, while improvements the heir makes afterward add to the heir's own basis.

Inherited property is automatically a long-term holding under 26 U.S.C. Section 1223(9)¹, so a sale one month after inheriting qualifies for long-term rates. If siblings inherit a house together, each one's basis is a proportional share of the stepped-up value, not a share of what a parent paid; see what to do with a house after a parent dies.

What happens if a parent added a child to the deed before death?

Adding an adult child as a joint owner does not automatically give the child's share a stepped-up basis. Under the contribution rule in 26 U.S.C. Section 2040(a), the full value of jointly held property is included in the first owner's estate except for the part the other owner can show they paid for, "never to have been received or acquired... from the decedent for less than an adequate and full consideration"¹. When a parent adds a child to a deed for free, the child contributed nothing, so the whole home steps up at the parent's death. This rule applies only to a non-spouse joint owner.

How much can step-up in basis save you?

Savings depend on how much the asset appreciated and the heir's tax bracket. For 2026, long-term capital gains are taxed at 0%, 15% or 20%: 0% covers taxable income up to $49,450 single or $98,900 married filing jointly, 15% runs up to $545,500 single or $613,700 married, and 20% applies above that¹². Higher earners may also owe the 3.8% Net Investment Income Tax¹³.

Example: a stock bought for $10,000 is worth $110,000 at death, so the stepped-up basis is $110,000, and a sale at $110,000 owes no capital gains tax.

How does step-up in basis vary by state?

Federal basis rules are the same nationwide, but state law decides who owns what share of an asset at death, which changes how much steps up.

At least half of the community interest must have been in the decedent's gross estate for the full step-up to apply (26 U.S.C. Section 1014(b)(6), Cornell Law School, checked 2026-09-21). State inheritance and estate taxes are separate from basis; see inheritance tax by state.

Step-by-step: establishing the stepped-up basis after a death

1. List every asset: real estate, accounts, business interests, vehicles and valuable personal property.
2. Set aside accounts excluded from step-up, such as IRAs, 401(k)s and annuities.
3. Get the fair market value of each qualifying asset at death: an appraisal for real estate and businesses, statements for securities.
4. Check whether the executor is using the alternate valuation date; if so, get values six months after death.
5. If Form 706 is filed, ask the executor for Form 8971 and Schedule A⁸, due within 30 days of Form 706's due date or filing date, whichever comes first⁹; see our executor checklist.
6. Keep every appraisal, statement and closing document.
7. When you sell, report it on Form 8949 and Schedule D, using the stepped-up basis and long-term treatment.

What should you record in a family guide?

For each asset that will pass to heirs, record what it is, roughly what it is worth today, where the deed, title or account statements are kept, and whether a recent appraisal exists. That is exactly what a family guide keeps in one place.

• The asset name, location and approximate current value
• Where the deed, title, account statement or appraisal is kept
• The original purchase price and date, if known
• Major improvements made and roughly when
• Whether the asset is jointly owned, with whom
• The appraiser or advisor who last valued it, if any

What mistakes do people commonly make with step-up in basis?

Most mistakes come from guessing at values instead of documenting them.

• Using the decedent's original purchase price instead of the date-of-death value when reporting a sale.
• Not getting a real estate appraisal near the date of death, then reconstructing it later.
• Assuming a jointly titled account in a common law state gets a full step-up, not just the decedent's share.
• Forgetting that IRAs, 401(k)s and annuities never step up.
• Missing the one-year gift-back exception for recently gifted property.
• Losing track of capital improvements that affect the appraised value.
• Not asking for Form 8971 or Schedule A, then reporting a mismatched basis.

When to get professional help

A CPA can confirm the basis, handle Form 8949 and Schedule D, and check whether the Net Investment Income Tax applies. Bring in a real estate appraiser or business valuation specialist for a hard-to-value asset. Talk to an estate attorney if the property passed through a trust, ownership is unclear, siblings disagree, or Form 706 and Form 8971 are involved.