Step-Up in Basis

Reviewed 12 August 2026 · Sourced from the Internal Revenue Code, the IRS and the estate tax regulations

What a step-up in basis actually is

When you sell something for more than you paid, the profit is taxable. That is the whole engine of capital gains tax, and it runs on one number: your basis, which is what the asset cost you.

A step-up in basis is what happens to that number when the owner dies. It is replaced. The person who inherits the asset does not take over the old cost — they start fresh at whatever the asset was worth on the date of death. Every dollar of gain that built up during the owner's lifetime is simply never taxed. Not deferred to later, not taxed at a lower rate. Erased.

The rule is in 26 U.S.C. § 1014, and it has been in the tax code in some form since 1921. The statute is one sentence long in the part that matters: the basis of property acquired from a decedent shall be “the fair market value of the property at the date of the decedent's death.”

Two things make this different from most tax breaks. It is automatic — there is nothing to elect, file, or qualify for, and it applies whether the estate is worth $80,000 or $80 million. And it is enormous in proportion to how long the asset was held, which means it lands hardest on exactly the two things ordinary families tend to hold longest: a home bought decades ago, and an investment account nobody touched.

Why basis is the number that decides everything

Basis is not a tax concept people carry around in their heads, which is why the step-up goes unnoticed. But the arithmetic is simple.

Sale price − basis = capital gain

Buy shares for $10,000, sell them for $180,000, and the taxable event is not the $180,000 you received. It is the $170,000 of gain. Held longer than a year, that gain is taxed at long-term capital gains rates rather than ordinary income rates — 0%, 15% or 20% depending on taxable income — not gross income and not the size of the gain. Two special rates sit outside that list and both show up in inherited property: collectibles are taxed at up to 28%, and depreciation already claimed on a rental is recaptured at up to 25%. On top of any of it, a 3.8% net investment income tax applies to the lesser of your net investment income or the amount your income exceeds $200,000 single / $250,000 married filing jointly — thresholds that have never been indexed for inflation.

What basis starts as

Usually the purchase price plus buying costs. For a house it also includes capital improvements — a new roof, an addition, a replaced HVAC system — which is why keeping those receipts matters while you are alive. IRS Publication 551 is the IRS's own walkthrough of how basis is built and adjusted.

The three ways basis gets set when property changes hands

That middle row is the one that costs families money, and it is covered in full below. A gift does not wipe the slate clean. Only death does.

Worked examples: what it is worth in dollars

An index fund held for thirty years

A grandmother put $10,000 into a broad index fund in 1995. She never touched it. On the day she dies it is worth $180,000.

Same shares, same buyer, same price. The entire difference is which side of one day the sale happened on.

A house bought in 1988

Bought for $52,000, worth $310,000 now. If it passes at death, the children's basis is $310,000 and a sale at that price produces no taxable gain at all. If the parent signs the deed over during her lifetime, the children take her $52,000 basis and a sale produces a $258,000 gain — roughly $38,700 in federal tax at 15%.

They also cannot fall back on the home-sale exclusion that would have protected her. Under IRS Topic 701, up to $250,000 of gain ($500,000 for a married couple filing jointly) is excluded only for someone who owned and lived in the home for two of the previous five years. Adult children living elsewhere do not meet that test.

Two small mercies that come with it

Inherited property is treated as held long-term no matter how briefly you owned it — § 1223(9) — so a sale a week after the funeral still gets long-term rates. And the step-up applies asset by asset, so an heir can sell some holdings and keep others.

Gift now or inherit later: the comparison almost nobody runs

This is where the money actually gets lost, and it gets lost by people trying to be generous and organized.

When you give an appreciated asset away, the recipient does not get a fresh basis. They get yours. 26 U.S.C. § 1015 calls it a carryover basis: the basis “shall be the same as it would be in the hands of the donor” (nudged up only by any gift tax attributable to the appreciation). The gain travels with the asset and waits for them.

Take a position worth $300,000 that cost $30,000. Three routes to the same child:

The move that feels tidiest — sign it over now, keep it simple later — is the one with a $40,500 price tag. Doing nothing is the strategy, and it is free.

So give the right assets

None of this argues against generosity. It argues for choosing what you hand over. Cash and recently bought positions carry almost no built-in gain, so giving them away costs nothing in future tax. The thirty-year-old holding and the family home are the ones to leave in place. Most brokerages let you specify which tax lot you are transferring — pick the high-basis one.

And know where it does not matter

The step-up is worth precisely the tax it avoids, so on a small gain it is worth nothing. Long-term capital gains are taxed at 0% for 2026 taxable income up to $49,450 for a single filer and $98,900 for a married couple filing jointly (IRS 2026 inflation adjustments). If the whole gain fits inside that band, a lifetime gift costs nothing and is often the simpler answer.

What the step-up follows: your estate, not probate court

The most common misunderstanding is that avoiding probate means giving up the step-up. It does not. An asset steps up because it was counted in your estate when you died — not because a court touched it.

All of the following avoid probate and keep the step-up:

• A revocable living trust
• A payable-on-death (POD) bank account
• A transfer-on-death (TOD) brokerage registration
• A beneficiary or transfer-on-death deed, where the state allows one
• Anything else passing by beneficiary designation — with one large exception covered below: retirement accounts, which the rule excludes entirely

What destroys the step-up is giving the asset away outright while you are alive. Then it is not yours at death, it is not in your estate, and there is nothing to step up. That single distinction is the practical takeaway of this entire page.

Joint ownership and life estates sit in between and turn on how the paperwork was written — § 2040 decides how much of a jointly held asset is counted in the estate, and it treats a spouse differently from anyone else. That is a conversation for an estate attorney before a signature, not after one.

Married couples, and the community property difference

When one spouse dies, how much steps up depends on where the couple lives.

In most states, only the deceased spouse's half of a jointly owned asset steps up. The survivor keeps the original basis on their own half, and that old gain is still there waiting.

In the nine community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — both halves step up on the first death. IRS Publication 551 says it directly: “When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property.” The statutory hook is § 1014(b)(6).

On a $400,000 portfolio with a $100,000 basis, that is the difference between the survivor carrying a $150,000 unrealized gain and carrying none at all.

A handful of states that are not community property states let married couples opt into the treatment deliberately, by moving assets into a specific kind of trust. Tennessee is one, under the Tennessee Community Property Trust Act of 2010. Two cautions belong with it. The statute requires specific declaration language, a qualified trustee and both signatures, and the election has real consequences in a divorce. More importantly, no IRS ruling and no court decision has confirmed that an opt-in trust in a non-community-property state actually delivers the federal double step-up — § 1014(b)(6) speaks of property held under the community property laws of a state, and whether these trusts satisfy it is untested. Treat it as a planning position, not settled law, and as a reason to ask a lawyer rather than a do-it-yourself item.

What does not get stepped up

Any explanation of this rule that is all upside is incomplete. Here is the boundary.

Retirement accounts and other “income in respect of a decedent”

A traditional IRA, a 401(k), a 403(b), a non-qualified deferred annuity (to the extent of the untaxed gain inside it) and unreported savings bond interest are what the code calls income in respect of a decedent. Section 1014(c) excludes them by name, and IRS Publication 559 walks through the category. The heir pays ordinary income tax on every dollar, at their own rates, exactly as the original owner would have. Under current rules most non-spouse beneficiaries must also empty an inherited retirement account within ten years, which stacks that income on top of their own working income.

A Roth account is a different case for a different reason: there is no embedded tax to step up. Distributions reach the beneficiary tax-free once the account’s own five-year clock has been met — inherit a Roth that was opened two years ago and the earnings are still taxable until it is. The ten-year clock applies either way.

It steps down as well

The reset runs in both directions. Die owning something worth less than you paid and the basis drops to the lower date-of-death value — and the unused loss disappears. Nobody inherits your capital loss. A loss realized while you are alive can offset gains and up to $3,000 of ordinary income a year; a loss you die holding is worth nothing to anyone. The same is true of a capital loss carryforward you never finished using — it dies with the taxpayer, and neither the estate nor the heirs can claim it.

The one-year boomerang

Somebody eventually proposes gifting appreciated property to a seriously ill relative so it can come back with a fresh basis. Section 1014(e) closes it: if appreciated property was gifted to the decedent within one year of death and passes back to the donor or the donor's spouse, the old basis comes back with it.

How the date-of-death value actually gets established

The step-up is only as good as the number you can prove. This is the part that gets skipped, and it gets skipped because nothing forces the issue until years later when something sells.

Stocks, funds and ETFs

The estate tax regulations set the method: 26 CFR § 20.2031-2(b) uses the “mean between the highest and lowest quoted selling prices on the valuation date.” Average the day's high and low, multiply by the share count, and save the record. If the date of death fell on a weekend or a market holiday, the regulation works from the nearest trading days on either side. Mutual funds are the exception — they are valued at that day’s net asset value under § 20.2031-8, not by a high-low average.

Real estate, a business, land

Pay for a written date-of-death appraisal from a licensed appraiser, and do it early. A few hundred dollars spent within months of the death protects a six-figure number and ends any later argument. Reconstructing the value four years after the fact is expensive, and the answer is weaker.

What to do on the tax return

The 1099-B that arrives after a sale of inherited shares frequently shows the deceased owner's original cost, or nothing at all in the basis box. The Form 8949 instructions tell you how to handle both: enter “INHERITED” in the date-acquired column (always in Part II, the long-term section). Where the basis shown is wrong, the fix depends on whether the broker reported that basis to the IRS: if it did, enter it as shown and correct it with adjustment code B; if it did not, simply enter the correct basis and leave the adjustment columns alone. Filers overpay every year by assuming the broker's form is authoritative.

The alternate valuation date

An executor may sometimes elect to value the estate six months after death instead, under § 2032. It is narrow in three ways: the statute allows it only if the election decreases both the value of the gross estate and the tax owed; it is all-or-nothing across the entire estate rather than asset by asset; and because it lowers the estate value it also lowers the heirs’ basis. It is relevant only to estates large enough to file a federal estate tax return, and even there it is a trade-off rather than a free win.

What trips people up

• Putting an adult child on the deed to avoid probate. It works for probate and can be very expensive for taxes. A revocable trust or a transfer-on-death deed usually accomplishes the same thing without touching the basis.
• Assuming a gift resets the clock. It does not. Only death does. A lifetime gift hands over the asset and the gain together.
• Thinking this is only for large estates. The step-up is not means-tested, has no filing requirement and no threshold. It applies to a $9,000 brokerage account.
• Expecting retirement accounts to work the same way. They do not, and the difference should change which accounts you spend and which you leave.
• Holding a long-term loser to the end. There is no step-up benefit on a loss — it steps down and the loss dies with you.
• Trusting the 1099-B. Check the basis box on every inherited holding before it goes on a return.
• Never writing the date-of-death value down. The single most common and most fixable failure on this entire page.

The figures on this page are checked against the source that publishes them, and dated. Published rates move after the release named above — the linked source always carries the current number. This page explains a term; it does not recommend a product.