What is step-up in basis?

A short note before you start

This is general information for the United States, not legal, tax, financial, or medical advice. Basis rules get complicated fast with trusts, jointly owned property, and business interests, so confirm your numbers with a CPA or estate attorney before you file a return or sell an inherited asset.

What is step-up in basis?

Step-up in basis is the federal tax rule that resets an inherited asset's cost basis to its fair market value on the date the previous owner died, instead of carrying over whatever that person originally paid. "Basis" is the number the IRS uses to measure gain or loss when property is later sold. 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.

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 rather than what the owner originally paid. The rule ties basis to the value already used for federal estate tax purposes, so the same increase in value is not taxed twice, once through the estate and again through capital gains¹.

How does step-up in basis work, step by step?

Nothing needs to be filed to claim step-up itself; the reset happens automatically for property counted in the decedent's estate. The steps below are what an heir or executor does to put a usable number on paper.

1. List every asset the person owned: real estate, brokerage accounts, business interests, vehicles, and valuable personal property.
2. Set aside accounts excluded from step-up, such as IRAs, 401(k)s, annuities, and savings bond interest.
3. Get the fair market value of each qualifying asset as of the date of death: a licensed appraisal for real estate and businesses, brokerage statements for securities.
4. Check whether the executor elected the alternate valuation date; if so, use the value six months after death instead.
5. If Form 706 is filed, ask the executor for Schedule A of Form 8971, the estate tax value each beneficiary must use as basis; the two are required to match⁶.
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.

The alternate valuation date

An executor can choose to value the entire estate six months after death instead, but only if that election lowers both the gross estate value and the estate tax owed, and it applies to every asset in the estate, not one at a time³. Most estates skip this since most owe no federal estate tax, but it can matter when values drop sharply after a death.

When basis "steps down" instead

Step-up is not always a step up. If an asset is worth less at death than what the decedent paid for it, the heir's basis still resets to that lower date-of-death value, sometimes called a "step-down" in basis³, which can erase a loss the decedent could have claimed while alive.

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

Most property a person owns outright and leaves behind qualifies. A handful of account types are excluded because withdrawals from them were always taxed as ordinary income, so there was never a capital gain to erase.

This is also why an inherited IRA follows its own separate withdrawal schedule instead of a basis reset; 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 the heir (or the heir's spouse) within one year before death, and it passes back to that same donor or their spouse at death. The basis then carries over from the decedent's basis immediately before death instead of stepping up (26 U.S.C. Section 1014(e), Cornell Law School, checked 2026-09-23), to block a deathbed gift-and-return move.

Step-up in basis on inherited property: what about a lifetime gift instead?

People sometimes assume gifting an asset before death and leaving it at death produce the same tax result. They do not.

Whether to hold an appreciated asset until death or give it away during life also depends on the giver's own income needs and other goals, which is a question for a CPA or estate attorney.

Does step-up in basis apply to jointly owned and community property?

It depends on how the property was titled and which state the owners lived in. Federal basis rules are the same nationwide, but state property law decides who owned what share of an asset at death.

In the nine community property states, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, both halves of qualifying community property can step up to full fair market value at the first spouse's death, not only the half the decedent owned, as long as at least half the community interest was includible in the decedent's gross estate⁴. In every other state, only the deceased owner's own share of jointly held property steps up. State inheritance and estate taxes are a separate question from basis; see inheritance tax by state.

How much can step-up in basis actually save an heir?

Savings depend on how much the asset appreciated and the heir's own tax bracket, not the estate's. 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 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 married, thresholds not adjusted for inflation¹⁰.

Step-up is separate from federal estate tax, which applies to a large estate itself, only above the filing threshold of $15,000,000 for 2026 deaths⁵. Most estates owe no federal estate tax and still get the full step-up.

What should you record in a family guide about basis?

For each asset that will eventually 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 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's 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

• Whether the property was ever gifted to or from the person who will inherit it

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

Most mistakes come from guessing at values instead of getting a written date-of-death value early, or assuming the rule applies more broadly than it does.

• Using the decedent's original purchase price instead of the date-of-death value when reporting a later sale.
• Not getting a real estate appraisal close to the date of death, then struggling to reconstruct a value years later.
• Assuming a jointly titled account in a common law state gets a full step-up, when only the decedent's own share does.
• Forgetting that IRAs, 401(k)s, and annuities never get a step-up, no matter how they are held.
• Not asking the executor for Form 8971's Schedule A, then reporting a basis that does not match the estate's.

When to get professional help

A CPA can confirm the correct basis, prepare Form 8949 and Schedule D, and check whether the Net Investment Income Tax applies. Bring in a licensed appraiser or a business valuation specialist for a house or another 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. Our executor checklist covers the broader timeline these steps fit into.