Stepped-Up Basis at Death: What Resets and What Doesn't
How inherited assets take a new basis at date-of-death value, the assets that are excluded, the joint-ownership and community property differences, and the planning it rewards.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
When someone dies, most property they owned takes a new tax basis equal to its fair market value at death. Appreciation during the owner's life escapes income tax. The step-up does not apply to retirement accounts, annuities, and other income the deceased earned but had not received; joint and trust-held property follow their own rules.
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What steps up, and what does not?
| Asset | At death |
|---|---|
| Stocks, funds, real estate, business interests, art, collectibles | Basis becomes fair market value (or the alternate valuation date value, six months later, if the estate elects it on Form 706 — allowed only when it lowers both the gross estate and the estate tax) |
| Traditional IRA, 401(k), annuity gains, deferred compensation, unpaid wages, accrued interest | No step-up; taxed as income to the recipient ("income in respect of a decedent") |
| Roth IRA | No step-up needed; qualified distributions are tax-free |
| Property held jointly by spouses | Half steps up (the deceased spouse's half) in common-law states |
| Community property | Both halves step up if at least half is included in the deceased spouse's estate (Florida couples can opt in through a community property trust under the 2021 Community Property Trust Act, Fla. Stat. 736.1501–736.1512; the IRS has not ruled on these elective trusts) |
| Property held jointly with a non-spouse | The deceased's share, based on contribution, steps up |
| Appreciated property gifted to the deceased within one year of death that passes back to the donor or the donor's spouse | No step-up; the donor takes the deceased's basis (Section 1014(e)) |
| Assets in a revocable trust | Step up (included in the estate) |
| Assets in an irrevocable grantor trust not included in the estate | No step-up (Rev. Rul. 2023-2) |
| Depreciated business property | Steps up; depreciation starts over for the heir |
How does it apply to a business?
Shares of an S or C corporation step up, but the corporation's own basis in its assets does not. A partnership or LLC interest steps up, and a Section 754 election lets the partnership adjust its inside basis for the heir — giving them depreciation and reduced gain on the share they inherited. Sole proprietorship assets step up directly.
Why does it drive planning?
With the federal estate exemption at $15 million per person for 2026 (indexed from 2027), most estates owe no estate tax, so the income tax step-up is often the largest tax benefit at death. That favors holding appreciated assets until death rather than gifting them (gifts carry over the donor's basis), swapping low-basis assets back into the estate from grantor trusts where allowed, and spending down high-basis or income-in-respect-of-a-decedent assets first in retirement.
What documentation do heirs need?
A date-of-death valuation — brokerage statements, appraisals for real estate and business interests — and the estate's Form 706 and Schedule A (Form 8971) if one was filed; where the property added to the estate tax owed, heirs' basis cannot exceed the value finally determined for estate tax (Section 1014(f)). Without a record, heirs must reconstruct the value later, often with a retrospective appraisal, and bear the burden of proving it.
Frequently asked questions
Does a stepped-down basis happen too?
Yes. Assets worth less than basis at death take the lower value, and the loss is lost.
Does the step-up apply to foreign assets?
Yes. Section 1014 applies to property acquired from any decedent, U.S. or foreign, including Canadian property; Canada's own deemed disposition at death applies separately.
Can I get a step-up on property I inherited and then gave to my spouse?
The step-up happened at the first death; a later gift to a spouse carries that basis.
What if the estate did not file an estate tax return?
Basis is still fair market value at death; heirs document it themselves.
Official sources
The IRS explains: “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.” — Internal Revenue Service, Publication 551 (12/2025), Basis of Assets, https://www.irs.gov/publications/p551
The statute provides: “Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be—” — Legal Information Institute, Cornell Law School, 26 U.S. Code § 1014 - Basis of property acquired from a decedent, https://www.law.cornell.edu/uscode/text/26/1014
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk establishes date-of-death basis for heirs and files the Section 754 election where a partnership interest is inherited. See pricing or book a free fit call.
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