What Is the Step-Up in Basis at Death?

When someone dies, the cost basis of most property they owned resets to its fair market value on the date of death. The heir who inherits it can sell it the next day and owe capital gains tax only on growth after that date. Decades of unrealized gain are erased for income tax purposes.

That is the core rule, and its main clause is one sentence of the tax code: the basis of property acquired from a decedent is the fair market value of the property at the date of the decedent’s death (26 U.S.C. §1014(a)(1)). Section 1014(a) opens with “except as otherwise provided in this section,” and two of those exceptions matter for a taxable estate: an executor can elect an alternate valuation date six months after death (§1014(a)(2), tied to §2032), or, for certain farm and business real property, a special-use valuation (§1014(a)(3), tied to §2032A). Most estates never touch either election; the date-of-death rule above is what applies by default.

Basis is just the receipt the IRS keeps on an asset — what you paid for it. Death rewrites that receipt at the current price. That is the only analogy in this article, and it is worth holding onto, because most of what people get wrong about this topic comes from assuming the receipt gets rewritten on things where it does not.

What actually gets a step-up in basis?

Property you own outright and that is included in your estate at death. In a retirement context that usually means:

• Stocks, mutual funds and ETFs in a taxable brokerage account
• Real estate, including a primary residence and rentals
• A closely held business interest
• Collectibles and other personal property

The mechanism is inclusion, not sentiment. Section 1014(b) lists the categories of property treated as acquired from a decedent, and the anchor category is property that must be included in determining the value of the decedent’s gross estate (§1014(b)(9)). Being included in the estate is what earns the reset. Estate inclusion is a separate question from whether any estate tax is actually owed — an estate owes tax only if it exceeds the basic exclusion amount, and the step-up applies whether it does or not.

It works in both directions. If an asset has fallen below what was paid for it, the basis steps down to the date-of-death value. The statute says fair market value, not “the higher of.” That has a consequence for an asset carrying a large unrealized loss: a loss realized during life is available on a return, while the same loss held to death is erased along with the old basis.

What does NOT get a step-up in basis?

This is the part people get wrong, and it is the expensive part.

A traditional IRA does not get a step-up. Neither does a 401(k), a 403(b), a SEP or SIMPLE IRA, a deferred annuity’s untaxed gain, or accrued-but-unpaid savings bond interest. These are income in respect of a decedent — income the deceased person earned but had not yet been taxed on. Section 1014 says so explicitly: it “shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691” (§1014(c)).

So the entire pre-tax balance of a rollover IRA is still fully taxable as ordinary income to whoever inherits it. Death does not clean it. And for most non-spouse beneficiaries, the account also has to be emptied by December 31 of the calendar year containing the tenth anniversary of the death (26 U.S.C. §401(a)(9)(H); Treas. Reg. §1.401(a)(9)-5(e)(2)), which concentrates that ordinary income into a window that often overlaps the beneficiary’s own peak earning years.

There is a second, separate way an asset can lose its step-up, and it applies to appreciated property, not just retirement accounts. Under §1014(e), if a decedent received appreciated property by gift within the one-year period ending on the date of death, and that property then passes back to the original donor or the donor’s spouse, it does not get a step-up. It keeps the decedent’s — meaning, functionally, the donor’s own — adjusted basis. This is the rule behind a specific and often-suggested move: gifting appreciated stock to a terminally ill spouse or family member so it “gets a step-up” when they die shortly after. If the gift and the death both fall inside that one-year window and the property comes back to the donor, the step-up does not happen.

Read that next to the first section and the asymmetry is the whole point of this article. Take an illustrative $500,000 of growth: it is treated one way inside a brokerage account and the opposite way inside an IRA.

How does this work in a community property state like California?

Differently, and much more favorably, for married couples.

In a common-law state, a jointly owned account between spouses generally gets a step-up on the deceased spouse’s half. The survivor’s half keeps its original basis.

In a community property state, the whole thing can step up on the first death. The IRS states it plainly in Publication 555: “If you own community property and your spouse dies, the total fair market value (FMV) of the community property, including the part that belongs to you, generally becomes the basis of the entire property.” The statutory hook is §1014(b)(6), which reaches the surviving spouse’s one-half share of community property, provided at least one-half of the whole community interest was includible in the decedent’s gross estate.

The nine community property states named in Publication 555 are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Two limits on that. The property has to actually be community property — how an account is characterized under state law is a legal question, and separate property brought into a marriage or inherited by one spouse often is not community property. And the treatment turns on state law and titling, which is drafting work. That is an estate attorney’s job, not mine.

Does the step-up apply to a house?

Yes. A residence is ordinary property under §1014, so the basis resets to date-of-death value.

This matters most for a long-held home, where decades of appreciation can exceed the primary-residence gain exclusion under §121 by a wide margin. The exclusion caps out — $250,000 of gain for a single filer (§121(b)(1)), $500,000 on a joint return (§121(b)(2)(A)) — while the step-up does not. A surviving spouse who sells shortly after a death is often working with both — a stepped-up basis on the deceased spouse’s share (or the whole property, in a community property state) and the exclusion. In that situation the exclusion frequently has nothing left to do, because the stepped-up basis has already absorbed the gain.

There is also a timing element on the exclusion side for a widow or widower, so the two pieces do not stay available on the same schedule. An unmarried surviving spouse can still claim the larger $500,000 exclusion, but only if the home is sold within 2 years after the date of death and the joint-filer requirements under §121(b)(2)(A) were met immediately before the death (§121(b)(4)). Sell later than that and the exclusion drops to the $250,000 single-filer amount. Neither figure is adjusted for inflation.

If it helps to have the numbers in one place, I keep them all in the Ultimate Retirement Guide.

Does titling change it — joint account, TOD, or trust?

At a high level, and with the same caveat that drafting is an attorney’s work:

Joint account between spouses. In a common-law state, generally half steps up. In a community property state, potentially all of it, subject to the characterization question above.

Joint account with a non-spouse — an adult child added to a brokerage account, for example — runs on a different rule entirely and the 50/50 spousal split above does not apply. Under §2040(a), the amount included in the decedent’s estate, and therefore eligible for a step-up, is based on who furnished the consideration for the account: if the decedent funded all of it, the entire account can be includible in the decedent’s estate and receive a step-up on the whole balance, not half. The surviving joint owner generally has to show what they personally contributed to claim any of it as already theirs. This is a common misreading — a reader applying the spousal 50/50 rule to a joint account with a child will get the wrong answer, in either direction.

Transfer-on-death (TOD) or payable-on-death registration. TOD is a delivery instruction. It moves the asset outside probate but the asset was still the decedent’s and still in the gross estate, so the step-up on the decedent’s share is unaffected.

Revocable living trust. Assets in a revocable trust remain includible in the grantor’s estate, so they step up. This is the common misconception running backward — people worry that “putting the house in a trust” costs them the step-up. A revocable trust does not.

Irrevocable trust. Here the answer can flip. Rev. Rul. 2023-2 addressed assets in an irrevocable grantor trust that were not includible in the grantor’s gross estate, and concluded there is no §1014 basis adjustment, because the asset does not fall within any of the categories §1014(b) lists. Removing an asset from your estate can remove it from the step-up too. That trade is real, it depends entirely on how the trust is drafted, and it is not a decision to make from an article.

How does this change a Roth conversion decision?

It does not change the Roth math itself. It changes what the Roth is being compared against.

The instinct a lot of retirement content pushes is “convert aggressively, get everything Roth.” Where a balance sheet is dominated by a rollover IRA — an illustrative $2M, say — converting is a live question. But where a meaningful part of it is a low-basis brokerage account, the two buckets are not interchangeable:

• Every dollar left in the traditional IRA is ordinary income to somebody, eventually. There is no reset waiting.
• Every dollar of unrealized gain in the brokerage account has a reset waiting, for free, at death.

So where the cash for the conversion tax comes from is itself a tax question. Selling appreciated shares to fund a conversion realizes the gain now; leaving those shares alone means the basis resets at death and the gain is never taxed as income. Which of those matters more depends on the size of the unrealized gain, how long the position would otherwise be held, and how much of the balance sheet sits in the IRA versus the brokerage account. Cash and small-gain lots raise the same dollars without ending a reset that was already coming.

The two also interact inside a single tax year. In 2026 the top of the 0% long-term capital gains bracket is $98,900 of taxable income for a married couple filing jointly. A large Roth conversion fills that space with ordinary income, which pushes gains out of the 0% band and can pull in the 3.8% net investment income tax above $250,000 of MAGI for a joint filer (§1411(b)). That surtax applies to the lesser of your net investment income or the amount you are over the line, so being a little over costs a little. Conversions and gain harvesting compete for the same room — and neither of those is usually the constraint that binds first. A couple converting to the top of the 22% bracket lands at an AGI well past the first Medicare IRMAA threshold, which for 2026 starts at $218,000 of MAGI; see the Medicare IRMAA brackets guide for how that threshold is calculated and where it falls relative to ordinary tax brackets. Sizing a conversion off the capital-gains and NIIT lines alone, without checking IRMAA, can size it too large.

None of this is an argument against converting. The case for a conversion is strongest where the IRA is dominant, RMDs are large, and a surviving spouse will file single at some point — and none of those facts are changed by the step-up. What the step-up changes is the accounting on the funding side, which is a separate question from whether to convert at all.

What do people get wrong about this?

“My IRA gets a step-up too.” It does not, and this is the single most common error. §1014(c) is explicit.

“The step-up avoids the tax.” It removes the income tax on pre-death appreciation. It does not remove estate tax, which is a separate system with its own thresholds, and it does not remove income tax on gain after the date of death.

“I should never realize gains.” The step-up does not say that. Gains realized inside the 0% band carry no federal capital gains tax at all, and holding a single concentrated position for a benefit that arrives on an unknown date is an investment risk being carried for a tax reason. Both sides of that are real, and their relative size is specific to the portfolio.

“A trust kills the step-up.” A revocable trust does not. An irrevocable trust that removes the asset from your estate may.

“The heirs will figure out the basis.” Somebody has to establish date-of-death fair market value, and for a house, a business interest or an illiquid asset that means a defensible valuation obtained near the date of death, not reconstructed years later. For estates required to file an estate tax return, §1014(f) goes further: a beneficiary’s basis generally cannot exceed the value finally determined for estate tax purposes, so the executor’s reported figure and the heir’s basis are required to match — not just advisable to match. The consistency rule is narrower than it first sounds: §1014(f)(2) applies it only to property “whose inclusion in the decedent’s estate increased the liability for the tax,” so it does not reach an estate that owes nothing.

When this does not apply to you

• Your assets are almost entirely in pre-tax retirement accounts. If the brokerage account is small, the step-up is close to irrelevant to your planning and the inherited-IRA rules matter far more.
• You bought recently, or your basis is close to current value. With little embedded gain, there is nothing meaningful to reset, and the “hold to death” argument loses its force entirely.
• There is a non-tax reason to sell. Concentration risk, a spending need, or a position no longer wanted. The step-up puts a tax benefit of unknown timing on one side of that; it does not change what the non-tax reason is worth.
• The asset is being given away during life. For determining gain, lifetime gifts carry your basis to the recipient (§1015) — they do not get the reset. For determining loss, the rule is different: the recipient’s basis is the lesser of the donor’s basis or the fair market value on the date of the gift, so a position already underwater when it is gifted does not pass its loss along either. (The donor’s basis is also increased by any gift tax paid that is attributable to the appreciation.) So the embedded gain travels with an appreciated asset when it is gifted and disappears when it is inherited, which is why gifting and bequeathing are not interchangeable for the same asset. Charitable giving sits outside that comparison entirely, because the charity’s tax exemption absorbs the gain either way.
• You are not a U.S. taxpayer, or the property is held abroad. Estate inclusion drives the answer and non-resident rules differ.

Where this fits

The step-up is the reason a taxable brokerage account and a rollover IRA are not the same pile of money, and it is one input into a conversion decision rather than the answer to it. The rest of what happens to these accounts at death — inherited IRA rules, the 10-year window, beneficiary designations — sits in the estate and legacy topic hub.

---

Trust and titling decisions described here are drafted by an attorney.