Step-Up in Basis at Death
"The single biggest tax loophole in the U.S. code: hold an appreciated asset until you die, and your heirs sell it the next morning with zero capital gains tax. The IRS just… forgets the gain."
The 60-second pitch
Under IRC §1014, when a person dies and an asset passes to their heir, the heir's tax basis in that asset is "stepped up" to the asset's fair market value on the date of death. A lifetime of unrealized capital gains simply disappears for income tax purposes.
This is the foundation of the "buy, borrow, die" wealth-preservation playbook used by ultra-high-net-worth families:
- Buy appreciating assets — index funds, real estate, businesses, art.
- Borrow against the assets when you need liquidity (HELOC, securities-based line of credit, art-backed loan). Borrowing is not a taxable event.
- Die still holding the appreciated assets. Heirs receive them at FMV basis. They sell to pay off the loans. No capital gains tax has ever been paid.
The kicker for residents of 9 community property states (CA, AZ, TX, WA, NV, NM, ID, LA, WI): when one spouse dies, the entire community property gets a double step-up — both spouses' halves step up to FMV, not just the deceased spouse's. This is one of the most underappreciated tax benefits of living in California, Texas, or Washington.
Done right, step-up basis is what lets a family compound wealth across generations with essentially no capital gains drag. It's the most powerful tax strategy in the code — and it's free.
Real-world example
The setup. George (78) and Eileen (76) bought their Austin home in 1985 for $200,000. By 2025 it's worth $5,000,000 after 40 years of compounding appreciation. They also own $1.2M of Apple stock (basis $80K) and $800K of Berkshire Hathaway (basis $20K). Combined unrealized capital gains: $6.9 million.
The "do nothing" play. They are content in the house. They don't need to sell the stocks for income (pensions + Social Security cover them). They simply hold everything until death.
George dies in 2027. Because Texas is a community property state, the entire $5M house and both stock positions step up to FMV — not just George's half. Assume FMV at George's death: house $5.2M, AAPL $1.4M, BRK $850K. Eileen's new bases: $5.2M, $1.4M, $850K respectively.
Eileen sells in 2028. She downsizes — sells the house for $5.25M (basis $5.2M = $50K gain, taxed). She sells half the stocks to fund retirement living: $700K AAPL (basis ~$700K, near $0 gain) and $400K BRK (basis ~$400K, near $0 gain).
Lifetime cap gains "saved." Without step-up, those sales would have triggered tax on ~$6.9M of accumulated long-term capital gain. At 23.8% federal (20% + NIIT) = $1,642,000 of federal tax wiped. Texas has no state income tax, so total tax saved: ~$1.64M. In California or New York, the savings would be closer to $2.4M-$2.6M.
The step-by-step checklist
- Identify your appreciated assets. Houses, business interests, brokerage accounts, art, private equity, crypto. The bigger the unrealized gain, the bigger the step-up benefit.
- Hold them until death. Counter-intuitive but powerful. Don't sell to "lock in" gains. Don't gift appreciated assets to kids during life (gifts carry the donor's basis under §1015 — no step-up!).
- Borrow against the asset if you need cash. HELOC on the house, securities-based line of credit on the brokerage. Borrowing is NOT a taxable event. You access liquidity without selling.
- Confirm community property status if married. If you live in CA, AZ, TX, WA, NV, NM, ID, LA, or WI, both halves of community property step up at first death. Title your assets correctly as "community property" or "community property with right of survivorship."
- For non-community-property states, use a community property trust. Tennessee, South Dakota, Alaska, Kentucky, Florida, and others allow couples to opt into a "community property trust" that converts marital assets into community property — capturing the double step-up. Major opportunity for non-CP-state residents.
- For real estate held in JTWROS, only HALF steps up (the deceased spouse's half). Community property gets both halves. Consider re-titling.
- For LLCs/partnerships, file §754 election. A §754 election allows the partnership to step up its inside basis to match the new outside basis of the inheriting partner. Without it, the inside basis stays low and the heir pays cap gains anyway when the partnership sells. This is the trap.
- Date-of-death FMV documentation. Get appraisals on real estate, closely-held business interests, art, etc. Public stock uses the average of high/low on the date of death. The estate's appraisals become the heirs' basis — a low appraisal hurts the heirs forever.
- Use the alternate valuation date if it helps. §2032 lets the estate elect a valuation date 6 months after death IF the gross estate value AND estate tax both decrease. Useful if assets dropped post-death.
- Consider the "consistency requirement." Under §1014(f) (added in 2015), the heir's basis can't exceed the value reported on the estate tax return. Make sure the estate tax return values are consistent with — or higher than — what the heirs will report as basis.
- File Form 8971 if the estate filed Form 706. The estate must report basis information to heirs within 30 days of filing the 706.
- Skip the lifetime gift of highly appreciated property. A common mistake: gifting Apple stock to a kid in retirement so "they can use it." That kid takes your $80K basis and owes cap gains on the appreciation. Hold it. Let them inherit it. They step up.
- Reverse: gift the high-basis, low-appreciation assets during life. If you want to gift, gift cash, gift recent purchases, gift things that don't have meaningful unrealized gain. Save the appreciated stuff for the inheritance.
IRS code & authority
- §1014(a) The core rule. Property acquired from a decedent gets basis equal to FMV on the date of death (or alternate valuation date).
- §1014(b)(6) The community property double step-up. Both halves of community property step up at the first spouse's death — a state-property-law feature recognized federally.
- §1014(e) The "1-year clawback" anti-abuse rule. If you gift appreciated property to a person who dies within 1 year and bequeaths it back to you, the basis step-up is denied. Prevents deathbed transfer gimmicks.
- §1014(f) The consistency requirement (added 2015). Heir's basis cannot exceed the value reported on the estate tax return. Enforced via Form 8971.
- §1015 Basis of gifts. Gifts during life take the DONOR'S basis (carryover) — the opposite of step-up. This is why lifetime gifts of appreciated assets are usually wrong.
- §2032 Alternate valuation date. Lets the estate elect a valuation date 6 months after death if both the gross estate and estate tax decrease. The elected value becomes the heirs' basis.
- §754 Partnership election. Allows inside basis step-up to match outside basis at a partner's death. Critical for LLCs and partnerships — without §754, heirs of a partner pay cap gains when the partnership later sells assets.
- §743(b) The mechanism by which a §754 election adjusts inside basis after a partner's death.
- Form 8971 / Schedule A Estate basis reporting to heirs. Required for estates that file Form 706 after July 2015.
- State community property laws CA Fam. Code §760, TX Fam. Code §3.002, AZ Rev. Stat. §25-211, etc. State law determines community property classification; federal law honors it.
- Tennessee Community Property Trust Act Allows out-of-state couples (and TN residents) to opt into community property treatment via a TN trust — the most popular vehicle for couples in non-CP states.
Audit risk flags
- Title problems blocking step-up. If a house is titled JTWROS instead of community property, only the deceased spouse's half steps up. Defense: Review titling on every major asset before age 65. Re-title to community property where allowed.
- Lifetime gifts of appreciated property. Gifts carry donor basis under §1015 — no step-up. Defense: Don't gift appreciated assets to family during life. Gift cash or hold until death.
- §1014(e) 1-year rule. Gifting appreciated stock to a sick parent who dies within a year and leaves it back to you = no step-up. Defense: Don't try this gimmick. The IRS will catch it.
- Inconsistent basis reporting. Heir reports a higher basis than the estate reported on Form 706 = automatic IRS notice. Defense: Coordinate estate tax return values with the eventual basis the heirs will use. Save appraisal documentation forever.
- Missing §754 election on partnership/LLC interests. Heirs of a partner inherit at FMV outside basis, but without §754 election the inside basis stays low — heirs pay cap gains when the partnership sells assets. Defense: Make §754 elections in all family LLCs/partnerships. It's irrevocable but rarely a net negative.
- IRD assets don't step up. "Income in Respect of a Decedent" — IRA accounts, annuities, accrued bond interest, deferred comp — do NOT get §1014 step-up. Heirs pay ordinary income tax on these. Defense: Don't expect step-up on retirement accounts. Plan for ordinary-income tax on inherited IRAs.
- Appraisal too low. A low date-of-death appraisal lowers the heirs' basis and increases their eventual capital gains. Defense: Get an aggressive (but defensible) date-of-death appraisal. If estate tax isn't due anyway (estate < exemption), there's no downside to a higher appraisal value.
- Step-up may be on the chopping block. Various Biden / Greenbook proposals have proposed killing or modifying §1014. As of May 2026, none have passed. Defense: Use it while it exists. Don't bet on it surviving forever, but also don't sell early in anticipation of repeal that may not happen.
When NOT to do this
- You need to sell now. If you need the cash for living expenses or a big purchase, hold-until-death isn't an option. Sell, pay the tax, move on.
- The asset is depreciating or volatile. "Buy, hold, die" assumes the asset goes up. If it goes down, you're stuck with a tax burden AND a real loss. Re-evaluate periodically.
- You hold the asset in a retirement account. IRAs, 401(k)s, annuities — these are "Income in Respect of a Decedent" (IRD) and don't step up. Holding inside a tax-deferred account loses the step-up entirely.
- You're targeting a 1031 exchange or other deferral strategy. Sometimes a 1031 into better real estate is a better play than holding the original property to death. Run the math.
- Your estate exceeds the exemption. If you face federal estate tax at 40%, the cap gains "saved" via step-up may be smaller than the estate tax "added" by keeping the assets in your estate. SLATs, IDGTs, GRATs may save more on net — even though those strategies lose the step-up.
- State estate/inheritance tax states. NY, MA, OR, etc. have lower estate-tax thresholds. The step-up gain may be smaller than the state estate tax. Run the state-specific math.
- You're 50 years old. Step-up at death is great in theory but assumes you actually die. At 50, holding everything for 40 years means living with concentration risk you may not want. Diversify, pay some tax, and live your life.
Don't sell what your heirs will get for free
PilePilot's Books agent tracks your unrealized gains by asset, flags assets approaching long-term capital gains thresholds, and surfaces step-up planning opportunities. Built for small businesses — every line maps to a real Form 8971.
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Disclaimer. This page is educational and not tax advice. The §1014 step-up interacts with state property law (community property), §754 partnership elections, IRD assets, and the §1014(e) 1-year rule. Legislative proposals have repeatedly threatened to modify or repeal §1014 — none have passed as of May 2026, but the law could change. Before re-titling assets, making lifetime gifts, or executing a "buy-borrow-die" plan, work with both an estate attorney and a tax professional. All dollar examples are illustrative.