How Does Step-Up in Basis Work in Tennessee?
Inherited assets in Tennessee take a basis reset to fair market value on the date of death26 USC § 1014Verified Sep 15, 2026View source, and the gain on a later sale faces no state capital gains taxTenn. Pub. Ch. 181 (2017) (IMPROVE Act, HB 534), §§ 13, 15 — amending Tenn. Code Ann. §§ 67-2-102 and 67-2-124(c) (Hall income tax rate: 4% TY2017 → 3% → 2% → 1% → zero percent (0%) for tax years beginning on/after Jan. 1, 2021)Verified Sep 15, 2026View source.
Frequently Asked Questions
When someone dies, the cost basis of the property they leave is reset to its fair market value on the date of death26 USC § 1014Verified Sep 15, 2026View source under IRC § 1014. A later sale is taxed on the gain above that stepped-up basis, not above what the original owner paid, so the appreciation of the owner's lifetime is never taxed. The rule is federal and applies in Tennessee as in every state.
State capital gains tax is a separate layer from the federal tax. After the step-up, the gain on a later sale faces no state capital gains taxTenn. Pub. Ch. 181 (2017) (IMPROVE Act, HB 534), §§ 13, 15 — amending Tenn. Code Ann. §§ 67-2-102 and 67-2-124(c) (Hall income tax rate: 4% TY2017 → 3% → 2% → 1% → zero percent (0%) for tax years beginning on/after Jan. 1, 2021)Verified Sep 15, 2026View source. The step-up still matters: it sets the gain on which both the federal and the state tax are figured.
For the capital gains tax, inheriting is usually better than receiving a lifetime gift. Inherited property takes a basis reset to fair market value at death26 USC § 1014Verified Sep 15, 2026View source under IRC § 1014; a gift carries the donor's original basis26 USC § 1015(a)Verified Sep 15, 2026View source under IRC § 1015. Stock bought for $10,000 and worth $200,000 carries a $190,000 gain to the recipient of a gift and none to an heir. Property held in a revocable living trust still receives the step-up at the grantor's death.
No. Inherited property is treated as held long-term from the date of death26 USC § 1223(9)Verified Sep 15, 2026View source under IRC § 1223(9), whatever the actual holding period, so a sale the day after the inheritance is taxed at the federal long-term rates of 0%, 15%, or 20%IRC § 1(h); IRS Topic No. 409Verified Sep 15, 2026View source on any gain above the stepped-up basis, plus the Tennessee layer. Short-term ordinary-income rates never apply.
The new basis is the fair market value on the date of death26 USC § 1014(f), § 6035; IRS Pub. 551 (Basis of Assets); Form 8971 / Schedule AVerified Sep 15, 2026View source, and IRS Publication 551 sets the standard for each asset class: for a publicly traded security the average of the high and low prices that day, for real estate a qualified appraisal as of that date, for a privately held business interest an independent valuation (required where a federal estate tax return is filed). The valuation is what substantiates the basis on Schedule D when the heir sells.
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