Step-Up in Basis on Real Estate: How It Works in 2026

The basis resets to fair market value for property that passes from the decedent

Section 1014(a) sets the basis of property acquired from a decedent at its fair market value on the date of death, or under section 2032 the value six months after death if the executor elects alternate valuation. Section 2032 allows that election only if it lowers both the gross estate and the estate tax, so it is unavailable in an estate that owes none.

Section 1014(b) lists what counts as passing from the decedent: bequests and inheritances, property in a revocable trust, property passing under a general power of appointment, and under paragraph (9) any property included in the gross estate by reason of death or form of ownership. Paragraph (10) adds property held in a marital trust that is taxed in the surviving spouse's estate.

Publication 551 explains the consistency rule in section 1014(f). When an estate must file Form 706, the executor gives each beneficiary a Schedule A of Form 8971 with the estate tax value, and if the property increased the estate tax the heir's basis cannot exceed that value. Without a Schedule A, Publication 551 points to the appraised value used for state inheritance or transmission tax purposes.

Ownership form decides how much of a married couple's property steps up

Publication 551 says one-half of a qualified joint interest, property held by spouses as tenants by the entirety or as the only joint tenants with right of survivorship, is included in the first spouse's estate regardless of who paid for it. The survivor's basis is their own half at cost, less their depreciation, plus the stepped-up half.

In the nine community property states, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, Publication 551 says the total value of community property generally becomes the basis of the entire property when either spouse dies, if at least half was includible in the decedent's estate. The community property double step-up page covers trusts and moves between states.

Joint tenants who are not married follow a contribution rule. Publication 551's example: two owners bought business property for $30,000, one paid two-thirds, and on that owner's death two-thirds of the $60,000 value steps up, while the survivor keeps a cost basis in the third they paid for, reduced by their share of earlier depreciation.

Depreciation and gains deferred by exchanges disappear at death

Section 1250(d)(2) excludes transfers at death from recapture, and Publication 544 confirms that no gain is reported on depreciable real property transferred to an estate or beneficiary. The heir starts a new depreciation schedule on the building portion of the stepped-up value, as the inherited-then-rented page shows.

Replacement property from a 1031 exchange has a low carryover basis under section 1031(d), but at death it is valued like any other asset. A chain of exchanges ending at death therefore converts deferral into permanent exclusion, which is the logic behind swap until you drop planning.

A Delaware statutory trust interest is treated as a direct interest in the trust's real estate under Rev. Rul. 2004-86 because the trust is a grantor trust. The heir takes the beneficial interest at its date-of-death value; the DST transfers to heirs page covers what the sponsor's documents require.

A worked example: selling at 80 versus holding until death

Hypothetical, round numbers. A widow holds DST interests that are the end of a chain of exchanges begun with a $250,000 rental in 1995. Her adjusted basis is $180,000 and the interests are worth $1,600,000. If she sells in 2026, her gain is $1,420,000. Assuming $400,000 of it is depreciation taxed at up to 25 percent, the rest at the 20 percent rate and the 3.8 percent net investment income tax on all of it, federal tax is roughly $360,000.

If she holds and dies in 2026, her children take a $1,600,000 basis. A sale soon after produces little or no gain, and the depreciation and deferred gain are never taxed. Her estate is far below the $15,000,000 basic exclusion amount for 2026, so no estate tax is due either.

The trade-off is liquidity, management and concentration risk while she waits. Run your own numbers with your CPA, and compare with the 1031 versus holding for the step-up guide.

Lifetime transfers and some trusts forfeit the step-up

A lifetime gift carries over the donor's basis under section 1015 instead of resetting it; the gift now or inherit later page compares the two, and depreciation recapture on gifted property shows what the recipient inherits. Section 1014(e) also denies the step-up for appreciated property given to the decedent within one year of death that passes back to the donor or the donor's spouse.

Rev. Rul. 2023-2 holds that assets in an irrevocable grantor trust funded by a completed gift, and not included in the grantor's gross estate, do not receive a basis adjustment at the grantor's death, because they were not acquired from a decedent under section 1014(b). Planning that removes property from the estate usually removes the step-up with it.