Stepped-up basis & capital gains for inherited property
The single most valuable tax rule for inherited property. Here's how stepped-up basis works in Florida — and the situations where it doesn't apply.
Stepped-up basis is shorthand for IRS Section 1014 — the rule that resets the tax basis of inherited property to its fair market value on the decedent's date of death. It's the single most valuable tax rule for inherited assets, and it routinely saves families tens or hundreds of thousands of dollars in capital gains tax.
Most heirs don't fully understand it. Some assume their tax basis is what the decedent originally paid (it isn't, generally). Others assume it transfers to all assets equally (it doesn't — there are exceptions). Below: how it works, when it applies, and how to document it.
What stepped-up basis means — the dollar example
Imagine your grandfather bought 1,000 shares of a stock in 1980 for $5/share — total cost basis $5,000. At his death in 2026, the shares are worth $200/share — total value $200,000.
- If grandfather had sold the day before death: capital gains tax on $195,000 of appreciation ($200,000 − $5,000). At 15% federal long-term capital gains rate, ~$29,250 in tax.
- If you inherit the shares: your basis steps up to $200,000 (the date-of-death value). If you sell them next week for $200,000, your gain is $0. You pay zero capital gains tax.
- If you hold them and sell in 2028 for $230,000: your gain is $30,000 ($230,000 − $200,000). Your basis is the stepped-up basis, not the original $5,000.
What gets a step-up — and what doesn't
Most assets that pass at death get the step-up. A few don't.
- Real estate: yes, full step-up to date-of-death value.
- Stocks and bonds in taxable accounts: yes.
- Mutual funds in taxable accounts: yes.
- Non-publicly-traded business interests: yes, with appraisal.
- Personal property (collectibles, art, jewelry): yes.
- Cryptocurrency: yes, with documentation challenges (more on this below).
- IRAs and 401(k)s: NO. Tax-deferred retirement accounts don't get a step-up. Distributions to heirs are taxed as ordinary income (under SECURE Act rules).
- Roth IRAs: yes, in the sense that distributions are tax-free for heirs (Roth had no tax basis to begin with).
- Annuities: generally NO step-up; gain is ordinary income to heir.
- Series EE/I savings bonds: NO step-up; accrued interest is ordinary income to heir.
- Property held in irrevocable trusts (depending on structure): sometimes yes, sometimes no — depends on whether the asset is included in the decedent's taxable estate.
How to document the stepped-up basis
Documentation matters because the IRS won't accept your word for the date-of-death value. You need contemporaneous evidence.
- Real estate: appraisal as of date of death. Cost: $300–$600. Use an appraiser certified for date-of-death valuations.
- Publicly-traded securities: average of high and low trading price on date of death. Custodians often provide this in a basis-step-up report — request it from the brokerage.
- Mutual funds: NAV on date of death. Available from the fund company.
- Privately-held business interests: full business valuation by a qualified appraiser. Cost: $3k–$15k+ depending on complexity.
- Personal property of value: appraisal for items expected to exceed $5k–$10k. Photos and condition notes for everything else.
- Cryptocurrency: screenshots of date-of-death prices on the relevant exchanges. Timestamps matter.
Joint property — special step-up rules
Property held jointly between spouses gets a half step-up at the first spouse's death (the deceased spouse's half steps up; the surviving spouse's half doesn't). At the surviving spouse's death, that half steps up too.
Florida exception: property held as tenants by the entirety (a special form of joint ownership available only to married couples) gets the full step-up at the first spouse's death in some interpretations. The rules are technical; surviving spouses should consult on the question before selling.
Trust ownership and step-up
Whether trust property gets a step-up depends on whether the trust is included in the decedent's taxable estate. Generally:
- Revocable living trusts: yes, full step-up. The decedent retained control, so the trust is in the taxable estate, so the step-up applies.
- Irrevocable trusts (most types): generally NO step-up, because the assets aren't in the taxable estate. This is one of the trade-offs of asset-protection trusts.
- Grantor trusts that are also estate-included: yes, step-up.
- Special needs trusts, dynasty trusts, etc.: vary — depends on structure.
If you're considering an irrevocable trust as part of estate planning, the step-up trade-off is real. Sometimes it's worth giving up the step-up for asset protection; sometimes it isn't. We model the trade-off when designing trusts.
Selling within 2 years vs. holding
Heirs often ask whether to sell quickly or hold. Tax considerations:
- Selling within 1 year of death: minimal capital gain (sale price ≈ stepped-up basis). Often the cleanest tax outcome.
- Selling 2–5 years post-death: gain reflects only post-death appreciation. Modest tax usually.
- Holding 10+ years: appreciation builds up, but you've also benefited from rent or use. Decision depends on whether the asset suits your portfolio.
- Living in the home for 2+ years before selling: may qualify for the §121 primary-residence exclusion ($250k single / $500k joint), in addition to stepped-up basis. Stacking these can produce zero capital gains on substantial gains.
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