Personal Finance & Estate › Income, gift, estate & real-estate taxes › Federal estate & gift tax (unified; California has none)
Step-up in basis at death
Since 1921· Tax rule
Law or rule (2026)Set by statute, regulation or the agency; numbers change yearly.
At death, inherited assets get a new tax basis equal to market value, erasing the built-up capital gain.
See it on the Personal Finance & Estate map →How it works
Say you bought a building for $1 million, depreciated its basis to $400,000, and it is worth $5 million when you die: your heirs' basis becomes $5 million. They can sell right away with little or no income tax, and restart depreciation. It applies to real estate, stocks and business interests in the estate, even if no estate tax is owed. It doesn't apply to IRAs, 401(k)s or annuities, or to lifetime gifts, which keep your old basis. Losses step down too.
Why it matters for you
It makes holding appreciated property until death one of the most powerful tax strategies, and it is why lifetime gifts of low-basis buildings can be costly.
Think of it like
Like a lender re-appraising at today's value: the old purchase price stops mattering for heirs.
Rules, limits and sources (2026)
IRC Sec. 1014, dating to the Revenue Act of 1921; Sec. 1015 sets carryover basis for gifts; IRS Rev. Rul. 2023-2 denies it for irrevocable grantor-trust assets outside the estate.
Watch out for
Congress enacted carryover basis in 1976 (repealed before use) and briefly in 2010; repeal proposals like 2021's still surface.
Connections (6)
▸Step-up in basis at death is the income-tax side of Federal estate & gift tax (unified; California has none)Law or rule (2026)
How they connect
The two systems are linked by inclusion: property counted in your taxable estate, whether or not tax is owed, gets a stepped-up basis. Property given away during life avoids estate tax but keeps your old basis. So moving assets out of an estate trades estate-tax savings for heirs' future capital-gains tax.
When it applies
Both date from the same era: the estate tax in 1916, the step-up in 1921, with basis tied to estate value.
The rule
IRC Sec. 1014 sets basis at estate-tax value; Sec. 1015 sets carryover basis for gifts; IRS Rev. Rul. 2023-2 confirms the link.
Watch out for
With a $15 million exemption, many families gain more from the step-up than from avoiding estate tax; weighing the two is a judgment call.
▸Community property (California marital property) gets a full, both-halves Step-up in basis at deathLaw or rule (2026)
How they connect
In California, when one spouse dies, both halves of community property get a stepped-up basis, not just the decedent's half. A building bought for $1 million and worth $5 million gets a full $5 million basis for the survivor, erasing gain and recapture. Separate property held in joint tenancy gets only a half step-up.
When it applies
Congress added the both-halves rule in 1948 for the community-property states, now nine, including California.
The rule
IRC Sec. 1014(b)(6); California Civil Code Sec. 682.1 created 'community property with right of survivorship' title in 2001.
Watch out for
Assets titled in joint tenancy may still be community property, but proving it can be contested; ask an estate attorney to review title.
▸1031 like-kind exchange can defer gains until Step-up in basis at deathStandard practice
How they connect
Each 1031 rolls the old, low basis into the next property, so deferred gain and recapture pile up. If the owner holds the last property until death, the step-up resets basis to market value and the deferred tax is never paid. Planners call it 'swap till you drop'.
When it applies
Combines two rules dating from 1921; widely used by California property families across decades of exchanges.
How sure?
IRC Secs. 1031(d) (carryover basis) and 1014 (step-up); IRS Form 8824 tracks the deferred gain.
Watch out for
Congress has proposed taxing gains at death or capping 1031 deferral, as in 2021; neither passed, but the strategy depends on both surviving.
▸Step-up in basis at death wipes out Depreciation & recapture (27.5 / 39 years)Law or rule (2026)
How they connect
Recapture bites only when you sell. At death, basis resets to market value, so years of depreciation are never taxed back. Heirs also restart depreciation on the new, higher building value, sheltering rent again. That makes holding a fully depreciated building until death far cheaper than selling it late in life.
When it applies
Applies whenever depreciated property passes through an estate, under the 1921 step-up and later recapture rules.
The rule
IRC Sec. 1014, with Secs. 1245(b)(2) and 1250(d)(2) exempting transfers at death from recapture.
Watch out for
Proposals to tax gains at death would end this; less known, suspended passive losses are partly lost at death.
▸Taxable brokerage account (individual, joint or trust) passes to heirs with Step-up in basis at deathLaw or rule (2026)
How they connect
Stocks and funds held in a taxable account at death get a stepped-up basis, so heirs can sell without tax on the lifetime gain; retirement accounts don't. That favors keeping the most appreciated shares, spending from other sources, and selling losing positions during life, since losses step down and vanish.
When it applies
Applies to any brokerage account included in an estate, including joint, trust and transfer-on-death accounts.
The rule
IRC Sec. 1014; brokers have reported cost basis since 2011 and update inherited lots to date-of-death values.
Watch out for
Spouses' joint accounts get only a half step-up unless held as community property; brokers apply this unevenly, so heirs should check basis records.
▸Estate freezes: GRATs & sales to grantor trusts (IDGTs) trade away Step-up in basis at deathWatch out
How they connect
Assets moved out of the estate keep their old low basis; IRS Revenue Ruling 2023-2 confirms no step-up at death for irrevocable grantor-trust assets. For a California owner, losing roughly 37% in capital-gains and recapture savings can outweigh the 40% estate tax avoided. Protection: a 'swap power' lets the grantor trade cash back for low-basis assets before death.
When it applies
A central trade-off once exemptions rose; the IRS settled the basis question in March 2023.
How sure?
IRS Rev. Rul. 2023-2; IRC Secs. 1014 and 675(4)(C), the substitution power; estate planners' published comparisons of estate versus income tax.
Watch out for
Whether a swap made shortly before death holds up, and how to time it if death is sudden, are practical uncertainties.