Tax Planning · 9 min read
Step-Up in Basis: What Resets at Death, What Does Not, and Why the Difference Matters
Under IRC §1014, most inherited property takes a new cost basis equal to its date-of-death value, so gains built up during the owner’s life are never taxed as capital gains. Traditional IRAs and 401(k)s are excluded, lifetime gifts keep the giver’s basis, and community-property states reset both spouses’ halves at the first death.
Suppose a stock bought for $50,000 is worth $250,000. Sold during the owner’s life, it produces a $200,000 capital gain. Left to an heir, it takes a new basis of $250,000, and an heir who sells soon afterward reports roughly no gain at all. That reset is the step-up in basis. It is one of the largest tax effects in most estates, and it is also one of the easiest to lose, because it depends on which kind of asset is left behind and how it changes hands.
What follows is educational. The treatment of any specific estate or transfer should be confirmed with a tax professional or estate attorney.
What the Step-Up Question Is Really Asking
Most questions about the step-up are really questions about which dollars a family should spend, give or keep. A household usually holds three kinds of wealth that behave very differently at death:
- Appreciated property such as a brokerage account, a home or a rental, where the step-up can erase decades of gain.
- Pre-tax retirement accounts, which carry income tax to the heir and receive no step-up at all.
- Roth accounts and cash, which need no step-up because there is no built-in gain to erase.
The step-up rewards knowing which is which before deciding what to sell, what to give away during life, and what to leave.
The Rules: Section 1014 and Its Edges
Property acquired from a decedent generally takes a basis equal to its fair market value at the date of death. If the estate’s personal representative elects alternate valuation, the value six months after death is used instead. (26 U.S.C. §1014; IRS Publication 551) That election is allowed only when it lowers both the value of the gross estate and the estate tax, so it rarely applies to estates below the federal exclusion. (26 U.S.C. §2032)
- It works in both directions. An asset worth less than its basis at death steps down, and the unrealized loss disappears. Harvesting losses during life while holding gains is the ordering that matches the rule.
- The holding period becomes long-term. Inherited property sold at a gain is treated as held more than one year, however briefly the heir owned it. (IRS Publication 550)
- Depreciation recapture does not follow the property. The recapture rules for depreciated property do not apply to a transfer at death, so an heir inheriting a rental starts from the new basis. (26 U.S.C. §1245(b)(2); 26 U.S.C. §1250(d)(2))
- A deathbed gift back does not work. If appreciated property is given to someone who dies within one year and it passes back to the original donor or the donor’s spouse, the donor takes the decedent’s old basis, not a stepped-up one. (26 U.S.C. §1014)
Which Assets Reset, and Which Do Not
| Asset | At the owner’s death | What the heir owes |
|---|---|---|
| Taxable brokerage account | Basis resets to date-of-death value | Capital gains tax only on growth after death |
| Home, rental or other real estate | Basis resets to date-of-death value | Capital gains tax only on growth after death |
| Traditional IRA or 401(k) | No step-up | Ordinary income tax on every pre-tax dollar withdrawn |
| Roth IRA or Roth 401(k) | No step-up needed | Qualified distributions are tax-free |
| Property given away during life | No step-up; the recipient keeps the giver’s basis | Capital gains tax on the giver’s gain when sold |
Pre-tax retirement accounts are excluded because they are income in respect of a decedent: income the owner earned but never paid tax on, which the tax code follows into the heir’s hands. (26 U.S.C. §1014; IRS Publication 559) A child who inherits a $500,000 brokerage account may owe little on a prompt sale. A child who inherits a $500,000 traditional IRA owes ordinary income tax on each dollar as it comes out, generally within ten years. Taxed at 24 percent throughout, that is $500,000 × 24% = $120,000. The statements show the same balance; the after-tax inheritances do not match.
Gifts During Life Keep the Old Basis
A lifetime gift carries the donor’s basis to the recipient. (26 U.S.C. §1015) Deed a house worth $250,000, with a $50,000 basis, to a child during life and the child also receives the $200,000 of unrealized gain. Leave the same house at death and that gain resets to zero. If a gifted asset is worth less than the donor’s basis, the recipient uses the donor’s basis to measure a gain but the lower value at the date of the gift to measure a loss. (IRS Publication 551)
The instinct to move appreciated property out of an estate early often trades a certain capital gains cost for an estate tax the household would never have owed. In 2026 the federal basic exclusion amount is $15 million per person, so for most households the step-up, not the estate tax, is the rule that matters at death. Cash gifts within the $19,000-per-recipient annual exclusion carry no basis cost. (IRS, 2026 inflation adjustments (Rev. Proc. 2025-32)) The trap is specific to appreciated property.
Adding a child to a deed to avoid probate is a lifetime gift of that share. The child’s portion keeps the parent’s old basis permanently. Passing the house through the estate, or through a trust drafted for the purpose, preserves the full reset.
Married Couples and the Community-Property Double Step-Up
What resets at the first spouse’s death depends on how the couple’s property is characterized under state law.
- Community property. Section 1014(b)(6) treats the surviving spouse’s half of community property as acquired from the decedent, as long as at least half of the community interest is included in the decedent’s gross estate. The result is often called a double step-up: when either spouse dies, the entire community asset generally takes a basis equal to its full value. (26 U.S.C. §1014; IRS Publication 551) IRS Publication 555 lists nine community-property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. (IRS Publication 555)
- Joint property elsewhere. For spouses holding property as a qualified joint interest, half the value is included in the first decedent’s estate, so only that half steps up. The survivor’s half keeps its original basis. (IRS Publication 551)
Whether a given asset is community property depends on where the couple lived when it was acquired and how it is titled, which is why a move between states deserves a review of titling.
A Hypothetical Household, Worked Through
This illustration is hypothetical and simplified. It assumes a 15 percent long-term capital gains rate and ignores state tax, the net investment income tax and market movement after death. It is not a recommendation for any household.
A married couple owns a brokerage account worth $600,000 with a combined basis of $200,000, so $400,000 of gain is built in. One spouse dies. The survivor’s basis afterward depends on how the account was held.
| Community property | Qualified joint interest | |
|---|---|---|
| Decedent’s half: new basis | $300,000 | $300,000 |
| Survivor’s half: new basis | $300,000 | $100,000 (unchanged) |
| Survivor’s total basis | $600,000 | $400,000 |
| Gain if sold for $600,000 | $0 | $200,000 |
| Tax at 15% | $0 | $30,000 |
The arithmetic: $600,000 ÷ 2 = $300,000 for each half at death; $200,000 ÷ 2 = $100,000 of original basis in each half. Under community-property treatment both halves reset, so the survivor could rebalance or sell the whole account without tax. Under joint ownership the survivor carries $200,000 of gain forward. That gain resets later if the survivor holds the assets until his or her own death, when the heirs receive a basis equal to the value then.
The same household leaving a $500,000 traditional IRA in addition would see none of this. The IRA passes with its full income-tax liability intact.
How We Approach This in a Plan
We treat the step-up as one input in deciding which assets fund spending, which fund giving, and which pass to heirs.
- Spending order. Highly appreciated positions held for heirs may be worth keeping, while lower-gain assets fund spending. Where gains must be realized, the 0 percent capital gains bracket can make selling during life inexpensive.
- Account type. Because pre-tax accounts never step up, we look at whether Roth conversions during life shift income tax from heirs in higher brackets. The heir’s timeline is set by the inherited IRA 10-year rule.
- Giving. For charitable households, IRA dollars given through qualified charitable distributions leave appreciated taxable assets available to step up for heirs.
- Titling and beneficiary forms. Deeds, joint accounts and beneficiary designations can override a will and change basis results; see the documents that override your will.
- Real estate. For rental owners, holding until death is one of three exits from a rental property, each with different tax results.
We also make sure date-of-death values are documented promptly, since the heir will need them to prove the new basis when selling.
Questions Worth Answering Before You Decide
- What is the cost basis of each appreciated asset, and where are the records?
- Which accounts are pre-tax, Roth or taxable, and who is named as beneficiary on each?
- Is any property community property, and has a move between states changed its character?
- Is a lifetime gift of appreciated property being considered, and would the recipient be better off inheriting it?
- Has anyone been added to a deed or account as a joint owner for convenience?
- Is the estate near the federal exclusion, or is income tax the larger concern?
What This Does Not Mean
- It does not mean holding every position until death. Concentration, diversification and spending needs can outweigh a future tax benefit.
- It does not shelter retirement accounts. Traditional IRAs and 401(k)s carry their income tax to the heir.
- It does not mean the rule is permanent. The step-up is current law and has been debated in Congress for years; a plan that depends on it should keep some flexibility.
- It is not personalized advice. Titling, gifting and estate decisions belong with a tax professional and an estate attorney who can see the full picture.
Frequently Asked Questions
Q: What is the step-up in basis?
Under IRC §1014, property inherited from a decedent generally takes a cost basis equal to its fair market value on the date of death. Gains accumulated during the owner’s life are never taxed as capital gains, so an heir who sells soon after the death owes little or nothing.
Q: Do IRAs and 401(k)s get a step-up?
No. Traditional retirement accounts are income in respect of a decedent, so heirs pay ordinary income tax on withdrawals, generally within ten years. Roth accounts need no step-up because qualified distributions are already tax-free.
Q: Is it better to give appreciated assets away or leave them at death?
For appreciated property, the basis rules favor inheriting: a gift keeps the giver’s basis, while a bequest resets it. Cash and assets without built-in gains carry no such cost. The right answer depends on the rest of the plan.
Q: What is the community-property double step-up?
In community-property states, both halves of a couple’s community property generally take a new basis at the first spouse’s death under IRC §1014(b)(6). For jointly held property elsewhere, only the deceased spouse’s half steps up.
Q: Can an asset step down at death?
Yes. If the asset is worth less than its basis at death, the basis falls to the date-of-death value and the unrealized loss is lost.
Q: Does adding a child to a deed affect the step-up?
Yes. Adding a child as a joint owner is a lifetime gift of that share, which keeps the parent’s old basis. Only the portion passing at death steps up.
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The views and opinions expressed here are those of The Financial Sciences Company as of the publish date and are provided for informational and educational purposes only. They are not personalized investment, tax, or legal advice. The Financial Sciences Company, LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. Additional information is available in our Form ADV at adviserinfo.sec.gov.
General educational information, current as of 2026. Figures and rules change. For guidance specific to your situation, speak with a qualified professional.