What is step-up in basis?

A short note before you start

This guide explains how step-up in basis generally works under federal tax law. It is general information for the United States, not legal, tax, financial or medical advice. Basis rules get complicated with jointly owned property, trusts and business interests, so confirm your numbers with a CPA or estate attorney before filing a return or selling an inherited asset.

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. "Basis" is the number the IRS uses to measure gain or loss on a sale. 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.

In plain terms: if a parent bought a house for $80,000 decades ago and it is worth $450,000 when they die, the heir's basis becomes $450,000, not $80,000. The $370,000 of lifetime gain is never taxed to anyone, and an heir who sells soon after for close to $450,000 owes little or no capital gains tax.

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, usually higher, number rather than 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 tax³. Nothing needs to be filed: the date-of-death value becomes the heir's new basis, a later sale is measured against it, and only appreciation after death is taxable to the heir.

The alternate valuation date

An executor can instead value the whole estate six months after death, but only if that election lowers both the gross estate value and the estate tax bill, and it applies to every asset, not one at a time⁶. Most estates skip it, since most owe no federal estate tax, but it can matter when values drop sharply after a death.

Special-use valuation for farms and businesses

Real property used in farming or a closely held business can sometimes be valued at its actual use rather than its highest potential value, if the estate elects special-use valuation; that lower value becomes the heir's basis³.

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

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

Retirement accounts and annuities are excluded because withdrawals were always taxed as ordinary income; there was never a capital gain to erase³. 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), to block a deathbed gift-and-return strategy.

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 a professional appraisal or a comparative market analysis, especially if the property later sells for a different amount. 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), regardless of how long the decedent or heir held it¹, so a sale one month after inheriting still 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.

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 $48,350 single or $96,700 married filing jointly, 15% runs up to $533,400 single or $600,050 married, and 20% applies above that⁹. Higher earners may also owe the 3.8% Net Investment Income Tax once modified adjusted gross income passes $200,000 single or $250,000 married¹⁰.

Example: a stock the decedent bought for $10,000 is worth $110,000 at death, so the stepped-up basis is $110,000. Without the step-up, selling would trigger tax on $100,000 of gain; with it, an heir who sells at $110,000 owes tax on $0, and only pays tax on gain above $110,000 after that.

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). A few common law states let couples opt property into a community property trust, but that is a deliberate planning step, not the default. 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 the person owned: 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 A, the estate tax value each beneficiary must use as basis; the two are required to match⁷.
6. Keep every appraisal, statement and closing document permanently.
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, a family guide should 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 the kind of detail an executor otherwise reconstructs from scratch under time pressure, exactly what a family guide, such as the one Omliva helps a family build, keeps in one place ahead of time.

• 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
• Any major improvements made and roughly when
• Whether the asset is jointly owned, and with whom
• The name of the appraiser, agent 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 getting the date-of-death value in writing while it is still easy to obtain.

• 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 struggling to reconstruct a value later.
• Assuming a jointly titled account in a common law state gets a full step-up, when only the decedent's share does.
• Forgetting that IRAs, 401(k)s and annuities never get a step-up.
• Missing the one-year gift-back exception when a parent's property was recently gifted from the heir.
• Losing track of capital improvements the decedent made, which affect the value an appraiser should use.
• Not asking for Form 8971 or Schedule A, then reporting a basis that does not match the estate's.

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 house or hard-to-value asset, ideally close to the date of death. Talk to an estate attorney if the property passed through a trust, ownership is unclear, siblings disagree about a buyout, or Form 706 and Form 8971 are involved.