For assets that get the step-up under Section 1014, gain built up during the owner’s life is never taxed as income. Heirs get the step-up whether or not the estate owes estate tax. The rule also works in reverse, so property worth less than its basis at death steps down.
If the estate owes estate tax, the executor can instead elect the alternate valuation date under Section 2032, six months after death. The election is allowed only if it lowers both the value of the estate and the estate tax.
Married couples in community property states get a larger step-up. When the first spouse dies, both halves of their community property take a new basis. Elsewhere, only the part of a jointly held asset included in the first spouse’s estate is stepped up.
Not everything you inherit gets a step-up. Inherited traditional IRAs and 401(k)s get none. They are income in respect of a decedent: income the owner earned but never paid tax on. The heir pays income tax on withdrawals. Assets in an irrevocable grantor trust that sit outside the owner’s estate keep their old basis too.
A lifetime gift keeps the giver’s basis, so the recipient owes tax on the giver’s gain when they sell. Property you gave someone within a year of their death gets no step-up if it comes back to you or your spouse.
Sources
- 26 U.S.C. § 1014, Basis of property acquired from a decedent
- 26 U.S.C. § 1015, Basis of property acquired by gifts and transfers in trust
- 26 U.S.C. § 691, Recipients of income in respect of decedents
- 26 U.S.C. § 2032, Alternate valuation
- IRS, Rev. Rul. 2023-2 (basis of assets in an irrevocable grantor trust)
Reviewed and updated September 2026. General information, not advice for your situation.