Step-Up in Basis: The Most Valuable Estate Planning Rule

For the broader inheritance context, start with Estate and Inheritance Planning: A Complete Guide. This piece focuses specifically on step-up in basis — the single most valuable inheritance tax provision for most American families.

How step-up works

The mechanics are simple. Under IRC Section 1014, when you inherit property from a decedent, your basis in that property equals its fair market value (FMV) on the date of the decedent’s death. Any unrealized capital gains that accumulated during the decedent’s ownership are erased.

Example 1: Appreciated stock.

• Parent buys 1,000 shares of stock for $20 each in 1985: basis = $20,000
• Stock appreciates over 40 years; at parent’s death in 2026, worth $500 per share: FMV = $500,000
• Child inherits the stock
• Child’s basis = $500,000 (the FMV at death, not the parent’s original $20,000)
• If child sells immediately for $500,000: capital gain = $0, tax owed = $0
• If child sells later for $600,000: capital gain = $100,000 (based on stepped-up basis)

The $480,000 of gain accumulated during the parent’s lifetime is permanently erased.

Example 2: Real estate.

• Grandparents buy home in 1972 for $45,000: basis = $45,000
• Home appreciates to $1.2 million by 2026: FMV = $1,200,000
• Child inherits home
• Child’s basis = $1,200,000
• If child sells immediately for $1,200,000: capital gain = $0
• If child holds for 5 years and sells for $1,500,000: capital gain = $300,000 (from stepped-up basis)

The $1,155,000 of appreciation during the grandparents’ ownership is permanently erased.

The income tax savings

At 15% federal long-term capital gains rate (the most common bracket for middle-upper income inheritors), step-up saves 15% of the unrealized gain. At 20% plus 3.8% NIIT for high-income heirs, step-up saves up to 23.8% federal plus state tax.

Step-up savings calculation for the $490,000 gain example:

• At 15% federal LTCG + 0% state (Florida/Texas): $73,500 saved
• At 15% federal LTCG + 9.3% California state: $119,070 saved
• At 20% federal + 3.8% NIIT + 13.3% California: $181,370 saved

For wealthier families, the combined federal + state tax savings from step-up commonly exceeds $100,000 per inheritance event.

What qualifies for step-up

Most appreciated property owned by the decedent at death qualifies:

• Stocks and bonds held in taxable brokerage accounts
• Real estate (primary residence, investment property, vacation homes)
• Mutual funds and ETFs in taxable accounts
• Business interests (sole proprietorship, partnership interest, LLC interest, private company stock)
• Collectibles (art, antiques, precious metals held as investments)
• Cryptocurrency held in the decedent’s name

What does NOT qualify for step-up:

• Traditional IRA, 401(k), 403(b) balances. These are “income in respect of a decedent” (IRD) — taxed as ordinary income when heirs withdraw. No basis adjustment.
• Roth IRA, Roth 401(k) balances. Already tax-free, so step-up is irrelevant.
• Annuities. Retirement annuities generally don’t get step-up; the earnings portion remains taxable to beneficiaries.
• Pension income and Social Security. Not inherited assets in the typical sense.
• Assets held in irrevocable trusts (depending on trust structure — some retain step-up, some don’t)
• Savings bonds. Accrued interest may remain taxable to beneficiaries depending on election made.
• Gifted property (pre-death). Gifts carry over donor’s basis; only bequests at death get step-up.

The community property double step-up

Nine community property states offer a particularly powerful advantage for married couples:

Community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin.

In these states, property acquired during marriage is generally owned 50/50 by the spouses as “community property.” When one spouse dies, both halves of the community property receive step-up to current FMV — not just the deceased spouse’s half.

Common-law state example:

• Married couple owns $1M of stock (bought for $200K together), held as joint tenants
• Husband dies
• Wife keeps her $100K basis on her half ($500K value at death)
• Husband’s half gets stepped up to $500K
• Wife’s total basis in the stock: $100K + $500K = $600K
• If wife sells for $1M: gain = $400K, tax owed on accumulated gains from her half

Community property state example (same facts):

• Both halves step up to $500K at husband’s death
• Wife’s total basis in the stock: $500K + $500K = $1M
• If wife sells for $1M: gain = $0, tax owed = $0

The difference in this example: $400K of taxable gain eliminated. At 15% federal + state taxes, that’s tens of thousands of dollars in tax savings.

Important nuances:

• Character matters. Must be community property, not separate property (pre-marriage assets, gifts, inheritances). Separate property gets only single step-up.
• Joint tenancy isn’t community property. Many California couples hold real estate as “joint tenants with right of survivorship” because that’s what the deed form said. This forfeits the double step-up. Change the title to “community property” or “community property with right of survivorship” to preserve it.
• Document the character. Keep records showing property was acquired during marriage with community funds.

Alternate valuation date

For estates required to file Form 706 (federal estate tax return), the executor can elect to value estate assets either:

1. Date of death, or
2. Alternate valuation date — 6 months after death

The alternate valuation date is an all-or-nothing election (applies to entire estate), and can only be used if it reduces both the gross estate and the estate tax liability.

For estates below the $15 million federal exemption that don’t file Form 706, only date-of-death valuation applies.

Strategic use: If asset values decline significantly in the 6 months after death (such as during market crashes), the alternate valuation date can lock in lower estate tax value AND lower stepped-up basis for heirs.

Step-down: the flip side

Step-up also works in reverse — assets that have declined in value get a “step-down” to FMV. If an asset worth $100K at purchase is worth $30K at death, the heir’s basis is $30K (not the original $100K).

This creates a planning consideration: Don’t hold losing investments until death if you could realize the loss during life. Selling a depreciated asset during the owner’s life lets them claim the capital loss against other gains or up to $3,000 of ordinary income. Holding until death eliminates that loss.

Practical tip: Review portfolios for significant losses as end-of-life planning approaches. Harvest losses during life rather than letting step-down erase them at death.

Step-up vs. gift basis

A critical trade-off: gifts during life preserve the donor’s basis; bequests at death get step-up.

If you gift $100K of stock (basis $20K) to your child during your life:

• Child inherits your $20K basis
• When child sells for $100K: $80K capital gain
• Tax at 15% LTCG: $12,000

If you bequeath the same stock at death:

• Child inherits $100K basis (stepped up)
• When child sells for $100K: $0 capital gain
• Tax: $0

Difference: $12,000 of tax. Multiplied across larger gifts and longer holding periods, this matters substantially.

When to gift during life anyway:

• Transfer growth out of your estate. A $19,000 gift today that becomes $100,000 in 20 years is $100,000 out of your taxable estate.
• Active wealth transfer. If you want to provide money to family while you’re alive to see them use it.
• Estate tax reduction (for large estates). Using annual exclusion and lifetime exemption actively reduces estate size.
• Asset protection. Gifts may provide creditor protection or divorce protection.

When to hold until death:

• Highly appreciated assets where step-up savings exceed gifting benefit
• Real estate and family business typically held for bequest
• Estate below federal threshold. No estate tax benefit to gifting; step-up wins clearly.

Step-up after OBBBA

The One Big Beautiful Bill Act (2025) did not change step-up in basis. Section 1014 remains intact. Speculation about eliminating or limiting step-up has existed for years (the Biden administration proposed elimination in 2021; it didn’t pass), but current law preserves the rule.

What did change under OBBBA: The federal estate tax exemption rose to $15M per person — permanently. Fewer families face federal estate tax. This makes step-up in basis relatively more important than federal estate tax planning for the vast majority of households.

For estates under $15M: Federal estate tax is irrelevant. Step-up is the dominant tax consideration for inheritance planning.

For estates between $15M and $30M (married couples): Portability election makes federal estate tax manageable. Step-up remains primary focus.

For estates above $30M: Federal estate tax planning becomes significant. Step-up still matters substantially. Complex interactions between irrevocable trusts, gift strategies, and basis planning.

Common step-up mistakes

Gifting highly appreciated assets during life. The donor’s low basis carries over to the recipient. Better to hold for step-up in most cases.

Joint tenancy with non-spouse. Joint tenancy with children doesn’t typically preserve full step-up. Only the deceased joint tenant’s half steps up.

Holding losing assets until death. Step-down eliminates the loss that could have been realized during life.

Not tracking basis on inherited assets. Heirs must document date-of-death values for future sales. Without records, the IRS may challenge claimed basis.

Converting taxable assets to IRAs. Moving appreciated stock into an IRA eliminates future step-up (IRA distributions are ordinary income, not capital gains, and IRAs don’t get basis step-up).

Selling inherited assets immediately without considering holding. Step-up eliminates past gains, but future appreciation is still taxable. Inherited stock with $500K stepped-up basis that doubles to $1M still has a $500K taxable gain when sold. Step-up doesn’t eliminate all future tax — just eliminates past accumulated appreciation.

Forgetting about state-level step-up rules. Most states conform to federal step-up. Some have separate inheritance tax or asset tax rules that may apply differently.

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Frequently asked questions

Sources

Chris Gammill is the founder of Ignis Tools and writes about tax-aware retirement planning. Research and drafting assisted by AI tools; all figures and claims verified by the author against primary sources.

1. IRS Publication 551 — Basis of Assets — retrieved 2026-04-21
2. IRS Publication 559 — Survivors, Executors, and Administrators — retrieved 2026-04-21
3. 26 USC §1014 — Basis of property acquired from a decedent — retrieved 2026-04-21
4. Peter G. Peterson Foundation — What Is Stepped-Up Basis on Capital Gains — retrieved 2026-04-21