Understanding The Step-Up In Basis Rule (2024)

You may have heard the phrase that when someone dies, they get a Step-Up in Basis for their assets. Let’s talk about what a Step-Up in Basis really is and the common mistakes that people make.

What is Basis?

When attorneys, accountants, and financial people are talking about basis, we are discussing “Cost Basis”. The overly simplistic way to think about cost basis is that it is the purchase price of an object. For example, if you purchase one share of stock for $40, then the initial basis of that stock is $40.

When a person sells property, that person has to pay a tax on the gain from the sale. Gain is determined by subtracting the sales price of the object from the basis of such object. For example, if I sold stock for $100 and the basis was $40, the gain would be $60. Accordingly, it is important to track the basis of the assets that you purchase so that you are paying tax only on the gain ($60), not the entire sales price ($100).

What can get confusing is that the basis of an object is not just the price a person has paid for it. If you pay money to improve the object (such as putting an addition on to a house), the basis will increase. If you depreciate an object for tax purposes, the basis will decrease. For a more thorough discussion about basis, see my post: Understanding Basis.

Additionally, an object’s basis can change as the result of death.

Basis of an Object Can Change Upon Death

Tracking basis has gotten easier with the advance of technology. Nevertheless, it is not always easy to know how much someone paid for an object, particularly an object that is a family heirloom. Let’s say your great-grandparent paid $50 for a vase, and gifted it to your mother, and you inherited it from her. Now you wish to sell it for $5,000.

If you cannot prove the basis, the government presumes that the basis is $0. Accordingly, you would need to pay tax on the full $5,000. No one thought that this was fair for people to track basis indefinitely. As a result, the government passed a law commonly referred to as the “Step-Up in Basis” rule.

Section 1014 of the Internal Revenue Code states that if a person holds property at the time of his or her death, it will receive a new basis equal to the fair market value of such property at the person’s date of death. This is known as the Step-up in Basis rule because, in most circ*mstances, the fair market value of the assets owned by a decedent is greater than the basis of those assets just before the decedent’s death. However, it truly is a resetting of the basis equal to the fair market value at the time of death. Therefore, if you buy an asset and it depreciates in value, there is actually a Step-Down in Basis at death.

Additionally, it would be a mistake to think that the Step-Up in Basis Rule applies in all situations.

Not All Assets Receive a Step-Up in Basis

Not all assets are eligible to receive a new basis when someone dies. For example, assets owned inside an IRA, 401(k), and other retirement accounts do not receive a step-up. Also, assets owned inside of an S-Corporation or C-Corporation usually do not receive a step-up in basis.

Furthermore, assets owned inside most irrevocable trusts do not receive a step-up in basis. (In fact, the IRS recently issued guidance on this confirming that unless the irrevocable trust assets are includible in the estate of the Grantor (or beneficiary), it does not receive a step up in basis. See: Revenue Rule 2023-2)

Assets inside of a partnership can receive a step-up, but certain timely tax elections must be filed.

How do you prove the new basis after death?

Depending upon the overall value of your estate at the time of your death, and the types of assets that you own, you may not need to do very much.

Real Estate

If you own real estate, we typically recommend obtaining an appraisal from a realtor. Some people prefer to rely on local township tax appraisals. If you need to file an estate tax return or an inheritance tax return, we would recommend getting an appraisal from an individual certified to do appraisals.

Publicly Traded Stocks and Funds

Publicly traded stocks and funds are also usually easy to track as their values can easily be found online. Moreover, if you ask your financial advisor to obtain this information for you, they typically will do so.*

*TIP: Never sell an asset after death until the investment institution updates the account with the Step-Up in Basis. Otherwise, you may pay extra taxes unnecessarily and reporting will be very difficult.

Private Companies

Private companies will require the services of a certified business appraiser.


In most instances, you can obtain the value of an automobile using a service such as Kelley Blue Book: https://www.kbb.com/whats-my-car-worth/

Filing a Form 706 Estate Tax Return

If your estate (including gifts prior to death) is over the federal estate tax exemption (currently $12.9M for 2023), your executor will need to file the Form 706 Estate Tax return.

In most situations, the official fair market value basis for assets that you own at the time of your death will be determined by the value listed on Form 706. However, Form 706 only needs to be filed if you have a taxable estate or if your estate wishes to claim portability.

Special Rule for Community Property

The attorneys at The Pollock Firm LLC are not licensed in any community property states. However, we would be remiss if we didn’t add that there is a special Step-Up in Basis rule when dealing with community property. Specifically, when married couples own community property and one spouse dies, you don’t just get a step-up for the part owned by the deceased spouse. You get a Step-Up in Basis for the entire community property. (See IRS Publication 555 in March of 2020.)

Can You Gift Property to a Relative and Receive it Back on Their Death with a Step-Up in Basis?

If the beneficiaries of adescendant’sproperty get to take appreciated property with astep up in basis, why don’t people just transfer their property to a sick relative and then have them bequeath it back them when the sick relative dies? Well, unfortunately, this rarely works.

First, under Section 1014(e), if you receive a property by gift, you have to hold it for one year before you (or your spouse) can get the benefit of the step-up in basis rule. However, this can still be a very viable strategy if you aren’t interested in receiving the asset back. For example, let’s say you gift highly appreciated stock to your mother. She can then leave it to your children with a step-up in basis when she dies.

You must be very careful when doing this strategy though. Possible dangers include:

  1. Your mom could sell the assets, causing a tax.
  2. Your mom could give the assets away or bequeath it to someone else.
  3. Perhaps your mom needs to go into a nursing facility, and these funds would be needed for her care before she qualifies for Medicaid.
  4. You won’t want to gift too much to Mom or it could adversely affect your estate tax exemption. (It could also adversely affect her exemption.)
  5. Depending upon where your mother lives, this could result in an inheritance tax when you receive the property back. (For example, Pennsylvania has an inheritance tax.)

Many of the dangers can be mitigated though by ensuring that you don’t give away too much and that you ensure the proper titling of assets.

Inheriting an Asset with a Step-Up in Basis is a Good Thing!

As long as there is no actual tax due on your death, it can often be a really good thing to receive an asset with a high Step-Up in Basis. This is particularly true for rental real estate.

As always, if you have any questions, we are here to help you with your probate, estate planning, and tax planning needs.

Understanding The Step-Up In Basis Rule (2024)


How do you calculate stepped-up basis? ›

How Is Step-Up in Basis Calculated? A step-up in basis resets the cost basis of an inherited asset to its market value on the decedent's date of death. If the asset is later sold, the higher new cost basis would be subtracted from the sale price to calculate the capital gains tax liability, if any.

Do all beneficiaries get a step-up in basis? ›

Not All Assets Receive a Step-Up in Basis

Not all assets are eligible to receive a new basis when someone dies. For example, assets owned inside an IRA, 401(k), and other retirement accounts do not receive a step-up.

What is the step-up basis loophole? ›

The stepped-up basis loophole allows someone to pass down assets without triggering a tax event, which can save estates considerable money. It does, however, come with an element of risk. If the value of this asset declines, the estate might lose more money to the market than the IRS would take.

What assets do not qualify for a step-up in basis? ›

It's important to know that not all inherited assets are eligible for a step-up basis. Assets such as retirement accounts, including IRAs and 401(k)s, do not receive this step-up. The primary reason for this exclusion is the tax-deferred nature of these accounts.

How do you determine the cost basis of an inherited house? ›

Inherited property is received upon the death of another party. Cost basis for an inheritance is fair market value at the time of their passing.

How to avoid paying capital gains tax on inherited property? ›

Here are five ways to avoid paying capital gains tax on inherited property.
  1. Sell the inherited property quickly. ...
  2. Make the inherited property your primary residence. ...
  3. Rent the inherited property. ...
  4. Disclaim the inherited property. ...
  5. Deduct selling expenses from capital gains.

Do trusts avoid stepped-up basis? ›

Typically, assets you place in trust for your beneficiaries are eligible for a step-up in basis if the trust is revocable, and therefore considered part of your taxable estate. But with an irrevocable trust (which exists outside of your estate), trust assets do not receive a step-up in tax basis.

Does a surviving spouse get a step-up in basis? ›

If both parties contributed to the purchase of the property, then the surviving spouse is only entitled to a half step-up in basis. However, if it can be proven that the decedent was the only one to fund the purchase of the property, then a spouse could receive a full step-up in basis for the real estate.

Do I need an appraisal for stepped-up basis? ›

Even if no estate tax returns are filed, appraisals should still be obtained to determine the fair market value of the decedent's assets as of the date of death. This is important for determining the beneficiary's basis in the inherited property, which may be stepped-up to the fair market value.

What is the double step up basis rule? ›

When the surviving spouse inherits the deceased spouse's share of the marital property, the tax basis receives another step-up to its fair market value on the date of the surviving spouse's death. This is known as a “double stepped-up basis.”

Can you step up cost basis twice? ›

My understanding is that, in California and other states with community property laws, the basis of eligible inherited community property gets stepped up twice: once for the surviving spouse and then again for the person who becomes the final beneficiary of the asset.

Do LLC assets get a step-up in basis? ›

When a member of an LLC which qualifies as a disregarded entity dies, the assets held within the LLC will typically receive a step-up in basis, since the LLC is treated as an extension of the individual for tax purposes.

What is the 6 month rule for stepped-up basis? ›

For inheritances, the basis is the fair market value of the asset at the time of the donor's death (or six months afterward, if the executor elects the alternative valuation date). This is the stepped-up basis).

Does a house in irrevocable trust get stepped-up basis? ›

IRS: Assets conveyed to an irrevocable grantor trust are not eligible for step-up in basis.

Who determines step-up basis? ›

The Internal Revenue Service (IRS) chooses to use the fair market value at the time of a benefactor's death to determine the new value of the asset being transferred to help calculate the capital gains taxation of inherited properties.

What is the IRS rule on stepped up cost basis? ›

A stepped-up basis is a tax law that applies to estate transfers. When someone inherits investment assets, the IRS resets the asset's original cost basis to its value at the date of the inheritance. The heir then pays capital gains taxes on that basis.

Do I get a full step-up in basis when my spouse dies? ›

In every state, but community property states, spouses are considered joint tenants with rights of survivorship (JTROS). The surviving spouse may receive a step-up in basis for half the property when their spouse dies. The other half of the increased value would be included in the deceased spouse's estate.

What is the general rule for basis of inherited property? ›

The basis of property inherited from a decedent is generally one of the following: The fair market value (FMV) of the property on the date of the decedent's death (whether or not the executor of the estate files an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return)).

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