Quick Answer
- A step-up in basis resets the property’s tax cost to its fair market value on the date of death.
- This can wipe out most or all capital gains that accrued during the decedent’s lifetime.
- It applies broadly to real estate and many investments, but there are key exceptions (like retirement accounts).
- To lock it in, our Inherited Property Real Estate advisors recommend getting a professional date‑of‑death appraisal and keeping airtight records.
- When selling inherited real estate, your capital gain is typically: sale price – stepped‑up basis – selling costs – post‑inheritance improvements.
What “Basis” Means—and How the Step-Up Helps
Your tax “basis” is generally what you paid for a property, plus certain costs and improvements. When someone passes away and you inherit their property, the basis usually “steps up” to the property’s fair market value (FMV) on the date of death (or on an alternate valuation date if the estate elects it).Why it matters:
- Lower taxable gain on sale: If a home bought for $200,000 is worth $600,000 at death, the heir’s basis is typically $600,000. If they sell for $610,000 with $30,000 in selling costs, the taxable gain may be minimal or zero.
- Cleaner depreciation going forward: If you keep the property as a rental, your depreciable basis restarts from the stepped‑up amount, which can increase deductions.
Because both income tax and estate rules can intersect here, our Inherited Property Real Estate advisors recommend documenting value precisely to support future filings and any potential IRS questions.
What Gets a Step-Up—and What Doesn’t
Most capital assets held by the decedent receive a step‑up in basis, including:
- Residential and investment real estate
- Stocks, mutual funds, and many other securities
- Interests held in revocable living trusts (treated as owned by the decedent)
Key exceptions:
- Retirement accounts (IRAs, 401(k)s) generally do not receive a step‑up; they are “income in respect of a decedent.”
- Gifts made during life come with a carryover basis, not a step‑up.
- Installment notes and certain annuities can have special rules.
Ownership nuances:
- Community property states: A surviving spouse may receive a full step‑up on both halves of community property, not just the decedent’s half. This is a powerful tax benefit where available.
- Joint tenancy / tenants by the entirety: Often only the decedent’s portion is stepped up (state law varies).
Given these nuances, our Inherited Property Real Estate advisors recommend a quick title review to confirm how ownership form affects the step‑up.
Date of Death vs. Alternate Valuation Date
By default, FMV is set on the date of death. In some estates, the executor can elect an alternate valuation date (six months after death) if it reduces both the value of the gross estate and the overall estate tax. Not every estate qualifies or benefits from this strategy.If the market is volatile, our Inherited Property Real Estate advisors recommend discussing whether alternate valuation is even on the table, then aligning appraisal timing and evidence accordingly.
How to Calculate Gain After You Inherit
Here’s the practical framework when you sell:
- Start with stepped‑up basis (FMV at death or alternate valuation).
- Add capital improvements you paid for after inheritance (new roof, kitchen, additions).
- Subtract selling costs (commissions, transfer taxes, certain closing fees).
- Resulting amount compared to your sale price yields your capital gain or loss.
Example:
- Stepped‑up basis: $600,000
- Post‑inheritance improvements: +$25,000
- Total basis: $625,000
- Sale price: $640,000
- Selling costs: $30,000
- Amount realized: $610,000
- Potential capital loss: $610,000 – $625,000 = ($15,000)
Because heirs often face tight timelines, our Inherited Property Real Estate advisors recommend collecting all closing statements, contractor invoices, and appraisal reports in one digital folder for easy retrieval at tax time.
Keeping, Renting, or Selling: Tax Angle Considerations
- Keep and occupy: A step‑up minimizes embedded gains. If you later sell after living there two of the last five years, you may also qualify for the home sale exclusion (up to $250,000/$500,000), calculated off your stepped‑up basis.
- Convert to rental: You’ll depreciate based on the stepped‑up value (excluding land). Depreciation deductions can shelter rental income, but depreciation recapture may apply on a future sale.
- Sell shortly after inheriting: Many heirs owe little to no capital gains tax due to the step‑up, especially when selling near the date of death value.
If you’re considering a 1031 exchange after inheriting an investment property, that can be possible, but it’s often unnecessary if gains are minimal post step‑up. Our Inherited Property Real Estate advisors recommend modeling both options to understand cash flow, timing, and long‑term tax impact.
Documentation You Shouldn’t Skip
- USPAP‑compliant date‑of‑death appraisal for the property
- Broker price opinions and comps as supporting evidence
- Title documents (trust certifications, probate orders, recorded deeds)
- Repair/improvement invoices post‑inheritance
- Closing statements (when you sell)
Strong documentation is your best defense if the IRS or your state questions the basis. That’s why our Inherited Property Real Estate advisors recommend professional valuations over casual estimates.
Estate Sells vs. Heirs Sell
- Estate sells the property: The estate recognizes any gain or loss based on its basis (typically stepped‑up). Net proceeds flow to beneficiaries according to the will/trust.
- Heirs receive then sell: Heirs compute their gain using the stepped‑up basis once title passes. Timing affects who reports the sale and how deductions are captured.
Coordination with the executor or trustee matters. Our Inherited Property Real Estate advisors recommend aligning listing, repairs, and contract dates with the estate timeline to avoid reporting headaches.
Common Mistakes to Avoid
- Skipping the appraisal: Zillow isn’t sufficient proof of basis.
- Confusing property tax with income tax: A step‑up affects capital gains; it doesn’t prevent local property tax reassessment.
- Missing ownership nuances: Community property vs. joint tenancy can change how much gets stepped up.
- Losing receipts: Without documentation, you may forfeit basis increases and deductions.
- Assuming retirement accounts get a step‑up: They typically do not.
FAQs
- Do all heirs get the same basis?
Yes, generally heirs take basis equal to FMV at death allocated to their share, adjusted for property-specific details. - What if I inherit through a trust?
Most revocable living trusts confer a step‑up at the grantor’s death. Irrevocable trust rules vary. - Does the step‑up apply to a second death (surviving spouse)?
Often yes, with another step‑up at the second spouse’s death, subject to state and federal rules.
Get Guidance from Inherited Property Advisors
The step‑up in basis is simple in concept but technical in practice. Valuation, title, timing, estate choices, and your sale strategy all influence your tax outcome. To protect your savings and streamline the process, our Inherited Property Real Estate advisors recommend:
- Ordering a professional date‑of‑death appraisal immediately
- Verifying title form and community property status
- Building a sell/hold/rent plan that aligns with tax objectives
- Keeping meticulous records for your CPA
Inherited Property Advisors helps heirs value, position, and sell inherited real estate with confidence and compliance. Connect with us to get a clear, actionable plan tailored to your property and timeline.