Step Up in Basis

Contents

1. What the rule does
2. How title changes the answer
3. Spouses, trusts and the second step up
4. Why owners hold on
5. The proposals to end it

Brent O’Mara works with business owners and multigenerational families, and that work reaches into tax strategy often enough that the basis rule comes up early. The question a reader brings is plain: when a family sells what it inherited, does it owe tax on the gain the parent never paid tax on? For most inherited property the answer is no, and the reason is a provision of the tax code that resets the cost of an asset to its value on the day its owner died. University of Nebraska Lincoln extension economists describe stepped up basis as a provision that adjusts the value of an inherited asset to its fair market value at the time of the original owner’s death, so that any appreciation during the owner’s lifetime is never subject to capital gains tax when the heir sells.¹

What the rule does

Basis is the number from which gain is measured. For land, the extension authors explain, it is the amount originally paid, or the value when inherited, plus improvements, minus depreciation taken on those improvements.¹ The Washington Post’s real estate columnists put it in the same terms: the stepped up basis relates the owner’s cost, adjusted for improvements, to the value of the property at the time the owner dies, so an heir who inherits a house worth $1 million and sells it for $1 million owes no federal income or capital gains tax, because cost and sale price are the same.⁴ An American College of Trust and Estate Counsel fellow gave the stock example in 2020: an asset bought for $1,000 and sold for $3,000 produces a $2,000 gain, but if the owner dies when it is worth $3,000 the basis becomes $3,000 and a sale at that price produces no gain and no income tax.⁶

Figure

A Nebraska farm example

1. 01
   PurchaseA father buys land in the 1970s for $500 an acre and makes no depreciable improvements.
2. 02
   Sale during lifeIf he sells today at $7,000 an acre, he has a capital gain of $6,500 an acre and pays tax on it.
3. 03
   Death insteadIf he holds the land until death, the heir takes it at its fair market value of $7,000 an acre.
4. 04
   Sale by the heirThe heir owes tax only on any amount above $7,000 an acre, and can claim a loss if the land sells for less.

The Nebraska version is land. The extension example is a father who bought ground in the 1970s for $500 an acre; sold today at $7,000 an acre, it carries a $6,500 gain per acre, but held until death it passes to a child at $7,000, and the child owes tax only on anything above that.¹ Nebraska families also owe the county inheritance tax, and the values used there must match the values used for basis.¹

How title changes the answer

Not every form of ownership gets the full reset. A second extension article explains that the title on the deed often determines how much of a property qualifies, with the general rule that land included in the estate at death is what steps up.² Land owned by one person in fee simple receives a full step up. Land held by a married couple as joint tenants generally steps up only on the deceased spouse’s half, while the survivor keeps the original basis on the other half.² A parent who added three children to the title may have given them a full step up, if the parent paid for everything and documented it, or little or none if the documentation is missing or the children contributed.²

Figure

How title changes the step up

	Form of ownership	What steps up at a death
Owned by one person	Sole title	The whole property
Joint tenancy, married couple	Each spouse owns an equal share	Generally half, the deceased spouse's share
Joint tenancy, parent and children	Added to the title	Full, partial or none, depending on who paid and what was documented
Tenants in common	Undivided shares of any size	Only the deceased owner's share
Revocable living trust	Trust holds title	Generally the whole property, like sole ownership
Irrevocable trust funded by gift	Removed from the estate	None

Tenants in common are treated share by share: when one sibling dies, only that sibling’s share steps up, whether it goes to the co owner or to the sibling’s own heirs.² Trusts split by type. A revocable living trust generally allows a full step up at death, like individual ownership, while an irrevocable trust funded by a gift during life removes the property from the estate and eliminates the step up entirely.² Land held in an entity may step up at the level of the ownership interest, and a life estate deed, under which the parent keeps use and income for life, usually still qualifies because the property remains in the taxable estate.²

Spouses, trusts and the second step up

Married couples get the rule twice if they plan for it. The Journal of Accountancy explained that when a couple relies on portability, described in the entry on the exemption, the assets that pass to the surviving spouse generally receive a second step up at the survivor’s death, whereas assets placed in a traditional bypass trust at the first death step up only once.³ The same article recorded that proposals to eliminate basis step up for appreciated assets under Section 1014 had been widely publicized, and that planners regarded them as the worst of the possibilities on the table.³ The Post column added that moving a home into a revocable trust changes nothing here: the owner keeps the same basis, and the heir still inherits at the stepped up value.⁴

Figure

Proving the new basis

1. 01
   AppraiseAn appraisal of real estate as of the date of death establishes the new basis.
2. 02
   DocumentFor other assets, keep documents and published market data showing value on the date of inheritance.
3. 03
   Collect prices earlyPrice data on grain, livestock, machinery and prepaid inputs is hard to find months or years later.
4. 04
   Match the inheritance tax returnValues must equal what was reported to the county for Nebraska inheritance tax.
5. 05
   Or lose itIf a taxpayer cannot prove basis, the IRS may treat it as zero.

Why owners hold on

The rule changes behavior, and economists have measured it. A Congressional Budget Office working paper used the 1997 increase in the estate tax exemption to test how the estate tax affects decisions to sell appreciated assets, and found that households affected by the higher exemption realized significantly lower capital gains than households that were not.⁵ The finding supports what planners call lock in: because death erases the gain, an owner with a large unrealized gain has a tax reason not to sell during life, and the estate tax, by taxing what is held at death, had worked against that incentive.⁵ The Nebraska extension authors make the same observation from the farm side, noting that the rapid appreciation of agricultural land over a lifetime makes the question pressing for people who want to sell in retirement and for the heirs who inherit.¹ It is also why business succession planning so often turns on whether a company passes while the owner is alive or afterward.

The proposals to end it

The rule has been attacked for decades. The college fellow noted in 2020 that one candidate had described a stepped up basis loophole and seemed likely to propose treating death the same as a sale, so that the gain would be taxed at death, and that the idea had been around since at least the 1960s.⁶ No such change was enacted, and the extension authors observed in 2026 that under current law the step up matters only if someone wants to sell, while adding that it also generates fresh depreciation on inherited pivots, wells and buildings even when nothing is sold.² What a step up is worth, and whether a sale makes sense after one, depends on a family’s circumstances, and qualified professionals in tax and estate law should run the figures before a deed is changed.

A short glossary closes the entry. Basis is the cost from which gain or loss is measured. A step up is the reset of that cost to fair market value at the owner’s death. Fair market value is what a willing buyer would pay a willing seller, usually set for land by an appraisal. Joint tenancy with right of survivorship is shared ownership in equal parts that passes automatically to the surviving owner. Tenants in common hold undivided shares of any size that pass by will rather than by survivorship. A life estate gives one person the use of property for life, with ownership passing to another at death. Lock in is the tendency of owners to hold appreciated property because selling it during life would trigger the tax that death would erase.