Which assets step up at death?
| Asset | Basis for heirs |
|---|---|
| Stocks, funds, real estate, and business interests you own at death | Steps up to value at death |
| Assets in a revocable living trust | Steps up |
| Property owned jointly with a spouse (Pennsylvania and other non-community-property states) | Half steps up |
| Community property (California, Texas, and other community-property states) | Both halves step up |
| Traditional IRAs, 401(k)s, deferred compensation, annuity gains | No step-up |
| Assets given away during life | No step-up; recipient keeps your basis |
| Most irrevocable trusts that are outside your estate | No step-up |
Federal rules under Internal Revenue Code Section 1014. The 2025 tax law left the step-up unchanged.
How the step-up works
Your cost basis is generally what you paid for an asset. When you sell, you pay capital gains tax on the difference between the sale price and your basis. When you die, most assets you own receive a new basis equal to their fair market value on the date of death, or six months later if the executor elects the alternate valuation date, which is available only when it reduces both the value of the estate and the federal estate tax due.
The result: an heir who sells soon after inheriting typically owes little or no capital gains tax, no matter how much the asset grew during your lifetime. The rule works in both directions. An asset worth less than you paid steps down, and the loss is gone.
A worked example
A West Chester widow bought stock for $250,000 that is now worth $2,250,000. She is deciding whether to give it to her son now or leave it to him.
| Son’s basis | Federal tax if he sells at $2.25M | Pennsylvania tax | |
|---|---|---|---|
| Gift during life | $250,000 | $476,000 | $61,400 income tax |
| Inherited at death | $2,250,000 | $0 | $101,250 inheritance tax |
The federal figure for the gift assumes the full $2 million gain is taxed at 23.8%. Pennsylvania taxes the gifted stock’s gain at 3.07% when sold. The inherited stock avoids income tax but is subject to Pennsylvania’s 4.5% inheritance tax on transfers to children. Holding the stock still leaves the family about $436,000 ahead.
Hypothetical and simplified for illustration; assumes no federal estate tax is due and the stock is sold at its date-of-death value. A gift made within one year of death is generally pulled back into the estate for Pennsylvania inheritance tax.
Trusts: where the step-up is often lost
Whether trust assets step up depends on whether they are included in your taxable estate:
- Revocable living trusts are included in your estate, so their assets step up just as if you owned them directly.
- Irrevocable trusts funded with completed gifts are usually outside your estate. In Revenue Ruling 2023-2, the IRS confirmed that assets in an irrevocable grantor trust that are not included in the grantor’s estate do not receive a step-up, even though the grantor paid the trust’s income tax.
- Swap powers are a common fix. Many grantor trusts let you exchange assets of equal value with the trust, so you can move low-basis assets back into your own name, and high-basis assets or cash into the trust, before death.
See revocable vs. irrevocable trusts for how the two compare beyond basis.
Holding low-basis assets?
We’ll identify which assets carry the most built-in gain, decide what to give now and what to hold, and coordinate trust terms with your estate attorney so the step-up isn’t lost.
Schedule a call →Real estate and the step-up
For investment real estate the step-up is especially valuable. At death, both the capital gain and the depreciation recapture built up over years of ownership are generally eliminated, and heirs begin depreciating the property again from its new basis. Gain deferred through a series of 1031 exchanges is wiped out the same way, which is why many investors exchange until death rather than selling.
For a married couple in Pennsylvania who own property jointly, only the deceased spouse’s half steps up at the first death. The full property steps up only at the second death. Couples in community-property states get a full step-up at the first death.
Assets that don’t step up
- Retirement accounts and deferred income. Traditional IRAs, 401(k)s, deferred compensation, and the gain inside annuities are “income in respect of a decedent.” Heirs owe income tax on withdrawals. See inherited IRA rules.
- Lifetime gifts. The recipient takes over your basis. See the gift tax guide for the trade-off.
- Deathbed gifts that come back. If you give appreciated property to someone who dies within a year and it passes back to you or your spouse, there is no step-up.
Why the step-up now outweighs the estate tax for most families
The 2025 tax law set the federal estate and gift tax exemption at $15 million per person ($30 million for a married couple) starting in 2026, indexed for inflation, with no scheduled expiration. Below those amounts, there is no federal estate tax to plan around, but the step-up still erases capital gains on everything held until death.
For many families that flips traditional advice. Giving away appreciated assets to shrink an estate can now cost heirs capital gains tax for no estate tax benefit. A better default is often to give cash or high-basis assets during life, hold low-basis assets until death, and keep records of date-of-death values. Estates required to file Form 706 must generally report those values to beneficiaries on Form 8971, and where an asset added to the estate tax owed, heirs must use that value as their basis.
Frequently asked questions
What is a step-up in basis?
A step-up in basis resets the cost basis of an inherited asset to its fair market value on the owner’s date of death. When the heir sells, capital gains tax applies only to growth after the date of death, so the gain built up during the original owner’s life is not taxed.
Do assets in a living trust get a step-up in basis?
Yes. Assets in a revocable living trust are included in the owner’s estate and receive a step-up in basis at death, the same as assets owned directly.
Do assets in an irrevocable trust get a step-up in basis?
Usually not, if the trust is outside the grantor’s taxable estate. In Revenue Ruling 2023-2, the IRS said assets in an irrevocable grantor trust that are not included in the grantor’s estate do not receive a step-up. Some trusts are drafted so assets are included in the estate, or give the grantor a power to swap assets, to preserve the step-up.
Does inherited real estate get a step-up in basis?
Yes. Inherited real estate generally receives a new basis equal to its value at death, which eliminates both the built-up capital gain and depreciation recapture. For property owned jointly by spouses in a non-community-property state such as Pennsylvania, only the deceased spouse’s half steps up at the first death.
Is the step-up in basis going away?
Not under current law. The 2025 tax law left the step-up in basis unchanged and set the estate tax exemption at $15 million per person from 2026 with no scheduled expiration. Proposals to limit the step-up have been made in the past, so it is worth reviewing plans when tax law changes.