How Does Step-Up in Basis Work in Arizona?

Estimate the new cost basis on inherited assets in Arizona under IRC § 1014, project federal and state capital gains tax if you sell, and see how much the step-up at death saves in taxes.

Settling the estate? Inventory and track every asset.

Frequently Asked Questions

At death, the IRS resets the cost basis of most inherited assets to fair market value (IRC § 1014). Pre-death appreciation is never taxed; only post-death appreciation can trigger capital gains when the heir later sells. Because § 1014 is federal law, residents of Arizona receive the same step-up as residents of any other state.

Arizona excludes 25% of long-term capital gains from state taxable income. 25% of net long-term capital gain is subtracted before state ordinary rates apply. The remaining portion is taxed at the standard state income tax brackets. The exclusion reaches only gain from an asset acquired after December 31, 2011. An inherited asset is treated as acquired when the decedent acquired it, not at the date of death, so the exclusion turns on when the decedent bought it. If the acquisition date cannot be established, Arizona does not allow the subtraction.

For tax purposes, inheriting assets is usually better than receiving them as a lifetime gift. Inherited property gets a step-up in basis to fair market value at death under IRC § 1014; gifted property carries the donor's original basis under IRC § 1015. If the donor bought stock at $10,000 that's now worth $200,000, a recipient who sells after a gift owes capital gains tax on the full $190,000 of 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.

Inherited assets always qualify for long-term capital gains treatment, even if the heir sells immediately. The rule is set by IRC § 1223(9), which deems the holding period long-term as soon as the property passes by inheritance. Federal long-term rates of 0%, 15%, or 20% (IRC § 1(h)) apply, plus any state-level tax.

Establishing the new basis means pinning down each asset's fair market value on the date of death (IRS Pub. 551). Securities use the high-low average for that day; real estate uses a qualified appraisal as of that date; private business interests need a formal independent appraisal (and one is required if a Form 706 is filed). Keep the documentation — when the heir sells, those numbers go straight to Schedule D as the cost basis.

IRC § 2032lets the executor of an estate elect to value assets six months after the date of death instead of on the date of death. Property that is distributed, sold, exchanged, or otherwise disposed of within those six months is valued as of the date it was disposed of, not the six-month date. 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 — currently estates over $15 million per individual.

Under IRC § 1014(b)(6), community property gets a full step-up — not just the deceased spouse's half — when the first spouse dies. Because Arizonais a community property state, the surviving spouse's half also resets to fair market value, wiping out the appreciation on both shares. In a separate-property state, only the decedent's half would step up; the survivor's half would carry its original basis forward. The result is a sharply reduced capital gains tax bill if the surviving spouse later sells.

The one-year rule (IRC § 1014(e))prevents a deathbed-gift loophole: appreciated property gifted to a dying person and inherited back by the original donor (or the donor's spouse) within twelve months does not get a stepped-up basis. The basis carries over from the decedent's pre-death adjusted basis. The rule does not apply to other beneficiaries — only when the property loops back to the donor side.

Step-Up in Basis in Arizona

Step-up in basis is a federal rule that applies to inherited assets in every state, including Arizona. When someone dies, the cost basis of property they leave to heirs is reset to fair market value on the date of death. If the heir later sells, capital gains tax is calculated against this stepped-up basis instead of what the original owner paid. For appreciated assets held for years or decades, the step-up can eliminate most or all of the gain.

Arizona excludes 25% of net long-term capital gains from state taxable income. After applying the step-up, the remaining gain is reduced by 25% before state ordinary rates apply. Combined with the step-up itself, Arizona residents often face a meaningfully lower effective rate on inherited-asset sales than residents of states without an exclusion. The exclusion reaches only gain from an asset acquired after December 31, 2011. An inherited asset is treated as acquired when the decedent acquired it, not at the date of death, so the exclusion turns on when the decedent bought it. If the acquisition date cannot be established, Arizona does not allow the subtraction.

Arizona is a community property state, which means 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, not just the deceased's half. This is a significant planning advantage compared to separate-property states. A Arizona revocable living trust with a community property provision preserves both the double step-up and probate avoidance.