Step-Up in Basis Planning (Section 1014)

How it works

Section 1014(a)(1) sets the rule: property acquired from a decedent takes a basis equal to its fair market value on the date of death, or on the alternate valuation date if the executor elects one. The heir's basis resets, up or down, to whatever the asset is worth at that moment.

The effect reaches further than people expect. Every dollar of capital gain that built up during the decedent's life simply disappears; the heir can sell soon afterward for close to that stepped-up value and owe little or no tax on the sale. The erasure covers depreciation too. Unrecaptured Section 1250 gain on real property, taxed at up to 25 percent on a lifetime sale, and Section 1245 recapture on personal property, taxed at ordinary rates, are both wiped out along with the rest of the gain, and the heir restarts depreciation from the new, stepped-up basis rather than the decedent's old one.

This is the terminal move behind two related strategies. The first is what practitioners call swap till you drop: chain 1031 like-kind exchanges across a lifetime, deferring gain at every trade, and never recognize any of it, provided the last replacement property is still on hand at death, when Section 1014 eliminates the entire deferred balance permanently. The second is simpler: never sell a low-basis stock position, a piece of real estate, or a closely held business during life; hold it until death so the heirs receive a clean, fair-market-value basis instead of the embedded gain.

None of this is free of a condition: it generally requires the asset to be includible in the decedent's gross estate, covered next.

What this is worth in Florida

The full value of it, undiluted. Florida has no individual income tax, so nothing about this benefit is shared with a state government. Every dollar of capital gain and depreciation recapture the step-up erases would otherwise have been a purely federal cost, so a Florida resident keeps the entire benefit of holding a low-basis asset until death rather than selling it during life.

Who this applies to

Two things have to be true, neither about the heir: the asset has to have been acquired from a decedent within the meaning of Section 1014(b), and held, not sold or given away, during life.

• Owned outright, by bequest, devise, or inheritance. Section 1014(b)(1) covers property acquired directly from the decedent or from the decedent's estate.
• Held in a revocable trust. Section 1014(b)(2) and (b)(3) treat trust property the decedent could revoke or amend the same as property owned outright; putting a low-basis asset into a revocable living trust does not cost the step-up. What matters is the reserved power, not the label: both provisions turn on a right the decedent kept to revoke, alter, amend or terminate the trust.
• The surviving spouse's half of community property. Section 1014(b)(6) works differently enough that it gets its own section below.

No qualification runs on the heir's side: no income threshold, no entity requirement, no election to file. The step-up applies automatically to includible property, and all of the planning sits in how the asset was owned and held, not in anything the recipient does afterward.

One category is carved out entirely: income in respect of a decedent under Section 691, principally retirement accounts, gets no step-up at all under Section 1014(c). I cover what that excludes under where it goes wrong below.

A second category catches people who assume grantor-trust status does the work. An irrevocable grantor trust whose assets are not included in the grantor's gross estate gets no step-up when the grantor dies. Revenue Ruling 2023-2 says so directly, and the reason is structural rather than technical: Section 1014 adjusts basis for property acquired from a decedent as Section 1014(b) defines that, and property the grantor neither owned at death nor could revoke was not acquired from them. Being a grantor trust under the Sections 671 to 679 rules is an income-tax attribution and carries no Section 1014 consequence of its own. This is why an intentionally defective grantor trust and a spousal lifetime access trust both trade the step-up away for what they buy on the estate side, and it is a deliberate trade rather than an oversight.

Community-property double step-up (Section 1014(b)(6))

A community-property regime multiplies the benefit. When one spouse dies, the death steps up both halves to fair market value: the decedent's own half under the general rule of Section 1014(a), and the survivor's half under Section 1014(b)(6). A couple in a common-law, separate-property state gets a step-up only on the half the deceased spouse actually owned; the survivor's own half keeps its old basis.

The statutory gate on the survivor's half is specific: at least one-half of the whole community interest, meaning the decedent's own share, has to be includible in the decedent's gross estate. The true community-property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Florida is not one of them: it is a common-law state, so a Florida couple does not get this automatic double step-up. Florida enacted its own elective route in 2021, the Community Property Trust Act at Section 736.1501 through 736.1512 of the Florida Statutes, letting a married couple opt into community-property treatment for assets placed in a qualifying trust. Requirements include both spouses signing, statutory warning language at the front of the instrument, an express declaration that it is a community property trust, and at least one qualified trustee.

No IRS ruling or court decision has confirmed that an elective community-property trust created in a common-law state like Florida actually delivers the Section 1014(b)(6) double step-up. I treat the federal tax result as unsettled, disclose that to a client considering one, and weigh it against non-tax downsides, including creditor exposure, divorce characterization, and complications with Florida's homestead protections.

What it requires

Confirming that the asset will actually be includible in the gross estate comes first. Gifting an appreciated, low-basis asset away before death undermines that, since a gift carries over the giver's own basis under Section 1015 instead of erasing the built-in gain. Holding the asset in the decedent's own name, or in a revocable trust, keeps it includible and keeps the step-up available.

Whether inclusion actually costs anything turns on the size of the estate. The basic exclusion amount defined in Section 2010(c)(3) was $13,990,000 per person for 2025 and is $15,000,000 for 2026, made permanent by the One Big Beautiful Bill Act and set to adjust for inflation again starting in 2027. With the exemption now high and permanent, the calculus has shifted decisively toward maximizing basis step-up for most of my clients, rather than reflexively pushing appreciated assets out of the estate.

Establishing the date-of-death value depends on the asset. Real estate and closely held business interests need a qualified appraisal performed as of the date of death. Marketable securities use a simpler convention instead: the mean of the high and low quoted prices on the date of death, the same method the estate tax itself uses.

An executor may instead elect to value the entire gross estate six months after the date of death, the alternate valuation date under Section 2032. The election is narrow: available only if the later date decreases both the gross estate's value and the combined estate and generation-skipping transfer tax, and unavailable simply to raise an heir's basis when no estate tax is owed. It also carries its own filing bar: none is available if the Form 706 is filed more than one year after its due date. Because it only applies when value has fallen, it works against maximizing basis more often than for it.

Filing a Form 706 is worth doing even when no estate tax is owed, since it can raise the basis the heir eventually relies on. When an estate files one, the reported value generally binds the heir's own basis under the consistent-basis rule of Section 1014(f): basis cannot exceed the value finally determined for estate-tax purposes. That reporting duty runs through Section 6035, and the executor has to furnish Form 8971 and each beneficiary's Schedule A by the earlier of thirty days after the 706's due date, including extensions, or thirty days after the 706 is actually filed.

For a married couple, the choice between electing portability and funding a credit-shelter trust at the first spouse's death is really a choice about a second step-up. Portability preserves the unused exemption without forcing appreciated assets into a bypass trust, keeping them in the survivor's own estate for a second step-up at the survivor's death; a credit-shelter trust shelters that growth from estate tax but forfeits the second step-up entirely. At current exemption levels the basis step-up is frequently worth more than the sheltering, though the two have to be weighed on the facts.

What you need to document

A contemporaneous qualified appraisal

For real estate and closely held business interests, an appraisal performed as of the date of death. This becomes the heir's basis, the single most valuable piece of documentation the family will hold for this asset.

Brokerage records for the date-of-death value

For marketable securities, records supporting the mean of the high and low quoted prices on the date of death.

The filed Form 706, where one was filed

Along with the Form 8971 and each beneficiary's Schedule A, since the consistent-basis rule ties the heir's basis to the value the estate actually reported.

Proof the asset was actually includible

Title or a deed showing ownership at death, the revocable trust instrument if the asset was held in one, or, for a Florida community property trust, the trust instrument itself along with the signatures and warning language the statute requires.

Where it goes wrong

Section 1014 is a statutory outcome, not a shelter, and nothing about claiming it needs to be disclosed as an abusive position. The actual risk is narrower: valuation, and getting the ownership structure wrong before death. Valuation is the audit battleground. A high date-of-death value maximizes the heir's basis, but in a taxable estate it also raises the estate tax, and the IRS can challenge an aggressively high valuation later, on an income-tax audit of the heir's eventual sale. The defense either way is the same: a contemporaneous, qualified appraisal as of the date of death, not a number reconstructed afterward to fit what the family wanted the basis to be.

• Retirement accounts and other income in respect of a decedent get nothing. Traditional IRAs, 401(k) balances, annuities, deferred compensation, accrued bond interest, and a cash-basis decedent's outstanding receivables are all income in respect of a decedent under Section 691, and Section 1014(c) excludes every one from the step-up. The heir inherits the decedent's basis, or lack of one, and owes ordinary income tax as the money comes out. Do not count on this strategy for a large pre-tax retirement balance; it only works for taxable assets: real estate, brokerage stock, a closely held business.
• A lifetime gift of the wrong asset. Gifting a low-basis, appreciated asset to an heir before death trades a free step-up later for a carryover basis now under Section 1015, usually the wrong move for an asset the family does not need to sell. Gifting still makes sense for a high-basis or rapidly appreciating asset someone wants out of the estate; it is the low-basis, do-not-need-to-sell asset that this defeats.
• The one-year boomerang. Section 1014(e) blocks an obvious end run. If I give an appreciated asset to a family member near death, and within a year that person dies and the property passes back to me, or my spouse, there is no step-up at all: basis stays at the decedent's own adjusted basis immediately before death, which defeats a deathbed gift made solely to turn a low basis into a stepped-up one.
• Getting the inclusion-versus-exclusion trade wrong at the high end. Step-up requires estate inclusion, effectively free under the current exclusion described above. Above it, the math can flip: each additional dollar of inclusion can cost up to 40 percent in estate tax to save at most roughly 23.8 percent in income tax on the heir's later sale, a crossover to run on the actual facts, not assume.

A situation where this comes up

The version I see most often is a client who has run one or more 1031 exchanges on investment real estate for years and is now weighing a final sale against simply continuing to hold. Selling resets nothing; the deferred gain from every prior exchange is still sitting in the basis. Continuing to hold, and eventually dying while still holding the replacement property, is what turns that gain into gain nobody ever pays tax on. The decision usually turns on whether the client is done actively managing real estate, not on the tax math.

The version that takes real care is a couple whose net worth is close to, or above, the current exclusion and still growing, exactly where reflexively pushing appreciated assets out of the estate, often into a credit-shelter trust at the first spouse's death, can cost a second step-up nobody needed to give up. With the exemption now permanent and this high, I would rather have that conversation before the first estate plan is finalized than after a credit-shelter trust is already funded.

The Florida community-property-trust conversation is its own category. A couple hears about the double step-up available in Arizona or California and asks why Florida cannot do the same. It can, through the 2021 trust statute, but I am candid that the federal tax result is not settled law, and that the trust brings non-tax consequences of its own. Some choose it anyway, eyes open; others decide the uncertainty is not worth the extra half-step of basis.