Capital Gains on Inherited Property: The Step-Up in Basis

When you inherit property, your tax basis in that property is "stepped up" to the fair market value on the date of the decedent's death. This means you owe capital gains tax only on appreciation that occurs after you inherit the property, not on any gains during the original owner's lifetime.

What step-up in basis means

The "basis" of an asset is the starting point for measuring capital gains. When you sell an asset, your taxable gain is the sale price minus your basis. A low basis on a highly appreciated asset can produce a large taxable gain. The step-up in basis rule under IRC 1014 resets that starting point.

When property passes from a decedent to an heir at death, the heir's basis in the property is not the original owner's purchase price. Instead, the basis is "stepped up" to the fair market value of the property as of the decedent's date of death. All of the appreciation that accumulated during the decedent's lifetime is eliminated from the heir's capital gains calculation.

Inheriting property is not itself a taxable event for income tax purposes. No capital gains tax is triggered at the moment of inheritance. Tax only becomes relevant when the heir eventually sells the inherited property.

Why step-up in basis matters

The practical impact of step-up in basis is enormous. Consider this example:

A parent purchased a house in 1985 for $100,000. The house is worth $400,000 when the parent dies and leaves it to their child. Without step-up in basis, the child inheriting the house would have a $100,000 basis, and a future sale at $400,000 would produce a $300,000 taxable capital gain. With step-up in basis, the child's basis is $400,000. If the child sells the house shortly after inheriting it for $400,000, the capital gain is $0. The $300,000 of appreciation during the parent's lifetime is never taxed as income.

The same principle applies to stocks, investment accounts, business interests, and other appreciated assets. A brokerage account full of low-basis stock accumulated over decades gets a full basis reset to current market value at the owner's death.

This rule has important estate planning implications. Heirs who plan to sell inherited assets promptly often benefit most from the step-up. Conversely, a donor who gives property away during their lifetime rather than at death transfers their original low basis to the recipient, which can result in significant capital gains for the recipient when they sell.

The OBBBA and step-up in basis

The One Big Beautiful Budget Act of 2025 (OBBBA) generated significant legislative discussion about the step-up in basis rule. Proposals were introduced that would have repealed or substantially limited the step-up, replacing it with a carryover basis system or a deemed-realization rule at death. These proposals were ultimately not enacted.

The step-up in basis under IRC 1014 remains unchanged for 2026. The rule applies as it has since 1954. Heirs who inherit property in 2026 receive a basis equal to the fair market value of that property on the decedent's date of death.

Determining fair market value at death

Because the stepped-up basis equals the fair market value (FMV) on the date of death, establishing the correct FMV is critical. Different asset types require different methods:

• Publicly traded stocks and funds: FMV is generally the average of the high and low trading prices on the date of death (or the nearest trading days if death occurred on a non-trading day).
• Real estate: FMV is typically established by a qualified appraisal conducted by a licensed real estate appraiser. The appraisal should be performed as close to the date of death as feasible using comparable sales from that time period.
• Business interests: FMV for privately held businesses typically requires a business valuation by a qualified valuator, often a CPA or certified business appraiser.
• Estate tax returns: If the estate was large enough to require a Form 706 estate tax return, the values reported on that return generally establish the FMV for basis purposes.
• Estate records and account statements: Brokerage statements, real estate appraisals, and other contemporaneous records from around the date of death are important documentation to retain.

Accurate documentation of the date-of-death FMV is important. If you later sell the inherited property, you will need to report your basis on Schedule D, and the IRS may request support for the basis you claim.

Jointly owned property

How much of an inherited asset gets stepped up depends on how the property was titled and what state the owner lived in.

Common-law states (most states): When spouses hold property as joint tenants with right of survivorship, or as tenants by the entirety, only the decedent's half of the property receives a step-up in basis. The surviving spouse retains their original basis in their half. So if a couple held a $400,000 home with a combined basis of $200,000, and one spouse dies, the survivor's basis becomes $100,000 (their original half) plus $200,000 (the stepped-up value of the decedent's half) = $300,000 total basis.

Community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin): Under IRC 1014(b)(6), both halves of community property receive a step-up to FMV at the death of either spouse. This means the surviving spouse's half also gets a step-up, not just the decedent's half. Using the same example, the surviving spouse's basis in the $400,000 home would be fully stepped up to $400,000, regardless of the original cost.

The community property advantage is significant for long-held, highly appreciated assets. It is one reason some married couples in common-law states consider using community property agreements or trusts to gain this treatment.

Alternate valuation date

Under IRC 2032, the executor of an estate may elect to value all estate assets 6 months after the date of death instead of the date of death itself, provided that doing so reduces both the gross estate value and the estate tax owed. This election is available only if the estate owes federal estate tax.

When the alternate valuation date election is made, the heir's stepped-up basis reflects the alternate date values rather than the date-of-death values. If the estate's assets declined in value during the 6-month period (for example, stock that dropped after death), the heir's basis would be lower under the alternate date. If the assets appreciated, the basis would be higher.

Assets sold or distributed during the 6-month period are valued at the date of sale or distribution, not the alternate date. The alternate valuation date election applies to all estate assets, not just selected ones.

Capital gains when you eventually sell

When you sell inherited property, the holding period is automatically treated as long-term regardless of how long you personally held it. IRC 1223(11) provides this long-term treatment even if you sell the day after inheriting. This means inherited property sales are always eligible for the preferential long-term capital gains rates.

In 2026, long-term capital gains rates are:

Source: Rev. Proc. 2025-32. See the full bracket tables for all filing statuses in our Capital Gains Tax Brackets for 2026 guide.

If you inherit a primary residence and later sell it, the IRC 121 home sale exclusion ($250,000 single / $500,000 MFJ) may also apply, provided you meet the ownership and use tests before selling. The two rules can work together to shelter a significant amount of gain.