A step-up in basis is the reset of an inherited asset’s tax basis to its value on the date its owner died. Except as section 1014 otherwise provides, the basis of property in the hands of a person acquiring it from a decedent, or to whom it passed from a decedent, is the fair market value of the property at the date of the decedent’s death, so the heir measures gain or loss on a later sale from that figure rather than from what the decedent paid (26 U.S.C. 1014(a)(1)).
The name carries a direction the statute does not. Subsection (a) names one figure, the fair market value at death, so property worth less at death than the decedent had in it is reset downward by the same words that reset an appreciated asset up (26 U.S.C. 1014(a)).
What the 6 Month Rule for Step Up Basis Actually Says
Basis follows the value the estate used, and an estate has a second valuation date available to it. Where the executor elects under section 2032, the heir’s basis is the property’s value at the applicable valuation date prescribed by that section instead of the date-of-death value (26 U.S.C. 1014(a)(2)).
That date is not simply the six-month anniversary of the death. Property distributed, sold, exchanged or otherwise disposed of within 6 months after the decedent’s death is valued as of the date of that disposition, and only property still undisposed of at that point is valued as of the date 6 months after the death (26 U.S.C. 2032(a)(1) and (a)(2)).
Two tests gate the election. It may not be made unless it decreases both the value of the gross estate and the sum of the tax imposed by chapter 11 and the tax imposed by chapter 13 with respect to property includible in the decedent’s gross estate, that sum taken after credits allowable against those taxes (26 U.S.C. 2032(c)). Chapter 11 is the estate tax, and chapter 13 is the tax on generation-skipping transfers (26 U.S.C. 2601).
Timing binds it as well. It is made by the executor on the estate tax return and is irrevocable once made, and it may not be made at all where that return is filed more than 1 year after the time prescribed by law, including extensions, for filing it (26 U.S.C. 2032(d)).
The willing-buyer standard behind fair market value, and the two-column mechanics the executor works through on the estate tax return, are set out in valuation.
What the Heir Reports on a Later Sale
Gain is measured from the stepped-up figure, and the decedent’s own cost drops out of the calculation. Say a decedent bought stock long before death, it was worth more when they died, and the heir sold it a few months later.
Decedent's cost 40,000
Fair market value at the date of death 95,000
Sale price 99,000
Gain reported by the heir 99,000 - 95,000 = 4,000The sale goes in Part II of Form 8949 with the appropriate box checked, the word INHERITED replaces an acquisition date in column (b), and the totals from Form 8949 carry to Schedule D (IRS, Instructions for Form 8949 (2025)).
Part II is where long-term transactions go, and property acquired by inheritance is generally reported there whatever the heir’s actual holding period. Property whose basis is determined under section 1014, and that is sold or otherwise disposed of within 1 year after the decedent’s death, is treated as held for more than 1 year (26 U.S.C. 1223(9)).
What the Step-Up Does Not Reach
One class of property is carved out of the rule entirely. Section 1014 does not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691 (26 U.S.C. 1014(c)).
Income in respect of a decedent is a defined category rather than a loose description. All income the decedent would have received had death not occurred, and that was not properly includible on the decedent’s final income tax return, is income in respect of a decedent (IRS, Publication 559 (2025)).
Those items are taxed to whoever ends up with them. Items of gross income in respect of a decedent that are not properly includible in the taxable period in which the date of death falls, or in a prior period, are included in the gross income of the recipient for the taxable year when received (26 U.S.C. 691(a)(1)).
A second carve-out runs the other way, and it exists to stop a deathbed round trip. Where appreciated property was acquired by the decedent by gift during the 1-year period ending on the date of death, and that property is then acquired from the decedent by the donor of it or the donor’s spouse, its basis in that person’s hands is the decedent’s adjusted basis immediately before death (26 U.S.C. 1014(e)).
Where the inherited asset had been depreciated in the decedent’s hands, depreciation recapture covers how a transfer at death is treated.
Community Property Steps Up on Both Halves
In a community property state the reset reaches the surviving spouse’s own half as well, so the survivor’s side of the asset is not left carrying the old cost. Property representing the surviving spouse’s one-half share of community property held by the decedent and the surviving spouse under the community property laws of any state is treated as acquired from the decedent, if at least one-half of the whole of the community interest in that property was includible in determining the value of the decedent’s gross estate (26 U.S.C. 1014(b)(6)).
Basis Must Match the Estate Tax Value
Where an estate tax return was filed, the heir’s basis is not a private number. The basis of property to which subsection (a) applies may not exceed the value finally determined for estate tax purposes or, for property with no such determined value, the value identified in a statement furnished under section 6035(a), and that ceiling reaches only property whose inclusion in the estate increased the estate tax liability (26 U.S.C. 1014(f)).
The statement is Form 8971, carrying a Schedule A for each beneficiary. An executor or other person required to file Form 706 or Form 706-NA under section 6018(a) or 6018(b) files Form 8971 and furnishes the Schedules A no later than the earlier of 30 days after that return was required to be filed, including extensions, or 30 days after it was filed (IRS, Instructions for Form 8971 and Schedule A, Rev. August 2025).
That schedule sets the ceiling the beneficiary has to work under. Where it indicates the property increased the decedent’s estate tax liability, the beneficiary’s initial basis may not exceed the final estate tax value it reports, and using a higher figure can carry a penalty equal to 20% of any resulting underpayment (IRS, Instructions for Form 8949 (2025)).
The requirement runs with the property rather than with the first owner. However many successive owners it passes through, it continues until the entire property is sold, exchanged or otherwise disposed of in one or more transactions that result in a recognition event for income tax purposes, or until the entire property becomes includible in another decedent’s gross estate, and it applies at every taxable event, a sale or exchange, depreciation, or amortization among them (section 1.1014-10(a)(3)).
The regulation then excepts a named list from that requirement, and one item on that list runs straight back to the community property rule. Property representing the surviving spouse’s one-half share of community property to which section 1014(b)(6) applies is excepted from the consistent basis requirement, whether or not it is included property (section 1.1014-10(c)(2)).
Stepped-Up Basis and Carryover Basis Are Different Rules
The rule sitting next to this one covers the lifetime gift, and it points at the other taxpayer’s history. Property acquired by gift takes the donor’s basis: it is the same as it would be in the hands of the donor, except that where that basis is greater than the fair market value of the property at the time of the gift, the basis for determining loss is that fair market value (26 U.S.C. 1015(a)).
Property acquired from a decedent starts again at the date-of-death value instead. The same shares handed over a month before a death and a month after it produce two different bases, and so two different gains on an identical sale.
Cost is a third figure again, the one a taxpayer builds by buying the asset rather than inheriting it or being given it, and fixed assets works that build-up through.
Firms whose estate and trust files pile onto one reviewer every spring can put a real block of that work through Accountably’s trial task and grade the output before a live file depends on it.
