Step-Up in Basis
Step-up in basis is an adjustment under IRC §1014 of an inherited asset's cost basis to its fair-market-value (FMV) on the date of the original owner's death. The original owner's basis is discarded; the heir takes a new basis equal to FMV, eliminating any unrealized appreciation as a future taxable event.
Step-up is the largest single tax-arbitrage lever in US wealth planning. An asset with $100k of original basis and $1M of FMV at death passes to the heir with a $1M basis — the $900k of appreciation is never taxed at the federal level. This is why 'die with appreciated assets' is a textbook strategy: hold the appreciated position, fund consumption from a different source, let the basis step up at death.
The alternate valuation date (six months after death, electable on Form 706) lets executors choose a later valuation if asset values have fallen — minimizing estate tax at the cost of a lower heir basis. For estates without estate-tax exposure (below the 2026 ~$13M federal exemption), the alternate election is rarely useful.
Community-property states (CA, AZ, ID, LA, NM, NV, TX, WA, WI) provide a 'double step-up' on jointly-held community property: the entire asset, including the surviving spouse's half, steps up at the first death. In other (separate-property) states, joint-with-rights-of-survivorship between spouses produces only a half step-up. The community-property regime is one of the under-appreciated reasons high-net-worth retirees relocate.
The Biden-era proposed elimination of step-up has not become law and remains a perennial reform topic. As of 2026, step-up is fully intact for federal estate tax purposes. State-level treatment is uniform with the federal rule for income-tax basis but varies for state-level estate tax in the dozen states that levy one.
B_heir = FMV_DOD (or FMV_AVD if elected)- B_heir
- = heir's new cost basis
- FMV_DOD
- = fair market value on date of death
- FMV_AVD
- = fair market value on alternate valuation date (6 months later, optional election)
Test data for inheritance and estate features should always include scenarios where a household member has died with appreciated assets — pre-death and post-death snapshots are different problems for the engine. Lot ledgers should carry an `acquisition_method = 'inherited'` flag with the date-of-death FMV recorded, and holding period should re-clock to long-term automatically. Community-property vs. separate-property state should be a household attribute, not derived implicitly.
Common pitfalls
- Treating a non-spouse joint-with-rights-of-survivorship transfer as fully stepped up — JTWROS between non-spouses gives a partial step-up only on the deceased's contribution percentage.
- Forgetting the alternate valuation election — once made, it applies to ALL estate assets, not selectively.
- Ignoring the state-level estate-tax basis difference in 12 states with separate state estate taxes.
- Computing basis at trade date rather than date of death for inherited lots — usually a multi-week difference but consequential when the market moved sharply.
Examples
Spouses own $2M home in joint tenancy in NY (separate-property state). One spouse dies; FMV $2.4M. Survivor's basis = (50% of original basis) + (50% × $2.4M FMV at death). If original cost was $400k: survivor basis = $200k + $1.2M = $1.4M.
Same $2M home, same original $400k basis, same death — but spouses live in California. Community-property double step-up: survivor's basis = full FMV $2.4M. The future $0.8M of un-taxed appreciation in CA is the actual planning prize.