By Harry Prabandham · Updated September 28, 2026
Estate & Legacy
Step-Up in Basis: How Inherited Assets Are Taxed
Inherited assets generally get a new cost basis equal to value at death, so gain that built up during the owner's life isn't taxed when heirs sell.
Step-Up in Basis: How Inherited Assets Are Taxed
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What is a step-up in basis?
- Under Section 1014, property acquired from a decedent generally takes a basis equal to its fair market value at the date of death.
- Unrealized gain from the owner's lifetime is not subject to income tax when heirs later sell.
- It applies automatically; heirs don't need to make an election.
- If an asset has fallen in value, the basis steps down to the lower value.
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Full Guide
What is a step-up in basis?
- Under Section 1014, property acquired from a decedent generally takes a basis equal to its fair market value at the date of death.
- Unrealized gain from the owner's lifetime is not subject to income tax when heirs later sell.
- It applies automatically; heirs don't need to make an election.
- If an asset has fallen in value, the basis steps down to the lower value.
Which assets get a step-up, and which don't?
- Stocks, funds, real estate, business interests, and collectibles owned at death generally qualify.
- Traditional IRAs, 401(k)s, and annuity gains are income in respect of a decedent and don't get a step-up.
- Assets in an irrevocable grantor trust excluded from the estate don't get one either, per Rev. Rul. 2023-2.
- Appreciated property gifted to someone within one year of their death and returned to the donor keeps its old basis.
How does community property get a double step-up?
- In community property states such as California, both halves of community property generally get a new basis at the first spouse's death.
- In other states, jointly held property between spouses generally steps up only on the half included in the decedent's estate.
- How spouses title assets therefore affects the survivor's future capital gains tax.
Should appreciated assets be gifted or held?
- Gifts during life carry over the donor's basis, so the recipient may owe tax on appreciation before the gift.
- Holding low-basis assets until death preserves the step-up for heirs.
- Gifting can still make sense for assets expected to grow significantly, since future growth leaves the estate.
- With a $15 million per-person exemption in 2026, many families face income tax on gains more than estate tax.
What records do heirs need?
- The executor determines date-of-death values, typically through statements for securities and appraisals for real estate and private interests.
- Estates that file an estate tax return may need to report basis to heirs on Form 8971.
- An executor can elect an alternate valuation date six months after death only if it lowers both estate value and estate tax.
Key takeaways
- Inherited assets generally receive a basis equal to date-of-death value.
- Retirement accounts and assets in excluded grantor trusts don't get a step-up.
- Community property can step up both halves at the first spouse's death.
- Rubric weighs basis when planning gifts and sales as part of overall wealth management; confirm the tax treatment with your CPA.
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