How Does Step-Up in Basis Work?

Yes, the step-up is a federal rule that applies in every state. State-level capital gains tax on the post-step-up gain is a separate, state-by-state question — some states tax capital gains as ordinary income, some have preferential rates or exclusions, and 8 states have no state tax on capital gains at all (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Wyoming).

For tax purposes, inheriting is usually better. Gifted property carries the donor's original basis (IRC § 1015 carryover basis); inherited property gets the step-up under IRC § 1014. If a donor bought stock at $10,000 that's now worth $200,000, a recipient who sells after a gift owes tax on the full $190,000 appreciation. The same recipient inheriting the same stock owes tax only on appreciation after the date of death. A revocable living trust preserves the step-up — assets held in the trust during life still receive the basis adjustment at death — while avoiding the probate process that a will alone triggers. You can create a revocable trust online through SimplyTrust in about 15 minutes.

IRC § 2032 lets the executor of an estate elect to value assets six months after the date of death instead of on the date of death itself. The election applies to the entire estate (not asset-by-asset) and only if it both decreases the gross estate AND the federal estate tax. When AVD is elected, the beneficiary's basis is the AVD value, not the date-of-death value. AVD only matters for estates large enough to file a federal estate tax return.

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), surviving spouses get a double step-up under IRC § 1014(b)(6) — both halves of community property reset to fair market value at the first spouse's death. In separate-property states, only the deceased spouse's half steps up; the surviving spouse's half retains its original basis. The double step-up means the surviving spouse can sell the asset shortly after death and owe little or no capital gains tax.

IRC § 1014(e) blocks the step-up if a decedent received appreciated property by gift within one year of death and the property passes back to the original donor (or the donor's spouse). The basis reverts to the decedent's adjusted basis rather than receiving a step-up. This rule prevents families from gifting appreciated property to a dying relative purely to harvest a basis adjustment.

You still pay long-term capital gains rates regardless of how short you held the inherited property. IRC § 1223(9) automatically classifies inherited property as long-term, so even a same-day sale qualifies for the lower long-term rates (0%, 15%, or 20% federal depending on your total taxable income). Combined with the step-up, this means selling immediately after inheriting often triggers very little or no tax.