What Is Step-Up in Basis?
When you die, the property you own gets a "step-up" — the heir's new basis becomes the fair market value at your date of death, not what you paid. That means if you bought for $200,000, depreciated $80,000, and the property is worth $500,000 when you die, your heir's basis is $500,000. They can sell immediately and owe zero capital gains tax and zero depreciation recapture. In community property states, both halves of a married couple's assets get the step-up (double step-up). This is why many buy-and-hold investors never sell — they let their heirs inherit and capture the tax-free reset.
A step-up in basis is a tax rule that resets a property's cost basis to its fair market value at the owner's death — wiping out both unrealized capital gains and depreciation recapture for the heirs who inherit it.
At a Glance
- What it is: Tax basis resets to fair market value at the owner's death
- Why it matters: Eliminates capital gains and depreciation recapture for heirs — they inherit a "fresh" basis
- Community property states: Both spouses' assets get full step-up (California, Texas, Arizona, etc.)
- Limitation: No step-up for gifted property — only inherited property qualifies
New Basis = Fair Market Value at Date of Death
How It Works
The reset. When you die, the IRS treats your heir as if they bought the property at its fair market value on the date of death. Your original cost basis, your depreciation history, your purchase price — none of it carries over. The heir starts with a clean slate.
What gets eliminated. Both unrealized capital gains and depreciation recapture disappear. You bought at $200K, depreciated $80K, it's worth $500K. If you sold, you'd owe tax on the $300K gain plus 25% on the $80K recapture. Your heir inherits with a $500K basis. They sell for $500K? Zero tax. They sell for $520K? Tax only on the $20K gain since inheritance.
Community property double step-up. In community property states (California, Texas, Arizona, Nevada, Washington, Idaho, Wisconsin, New Mexico, Louisiana), when one spouse dies, the surviving spouse gets a step-up on the entire property — not just the decedent's half. That's because both halves are treated as owned 50/50 from acquisition. So a $1M property bought for $300K gets a full $1M basis for the survivor. In non-community-property states, only the decedent's half steps up; the survivor's half keeps the original basis.
Interaction with trusts. Property held in a revocable living trust still gets the step-up — the trust doesn't change the tax treatment at death. Irrevocable trusts are different; if you've given away the property during life, it may not be in your estate and may not get the step-up. Estate planning and entity structuring matter here; work with an estate attorney.
No step-up for gifts. If you give property to your kids while you're alive, they take your basis (carryover basis). No reset. The step-up only applies at death. That's why "hold until you die" is a core strategy for buy-and-hold investors with appreciated real estate.
Real-World Example
Investor in Denver, Colorado. You bought a triplex in 2010 for $200,000. Over 14 years you claimed $80,000 in straight-line depreciation. The property is now worth $500,000. If you sold today, you'd face: (1) $300K capital gain ($500K − $200K), (2) $80K depreciation recapture at 25%. Combined federal tax could exceed $80,000.
You hold until you die. Your heir inherits with a $500,000 basis. They sell the next month for $500,000. Capital gains: $0. Depreciation recapture: $0. The entire $80K+ tax bill vanishes. That's the power of the step-up — and why many investors never sell, preferring to pass properties to the next generation.
Pros & Cons
- Eliminates capital gains and depreciation recapture for heirs
- No limit on the amount of appreciation that can be wiped out
- Community property states offer a double step-up for married couples
- Aligns with buy-and-hold strategy — hold, collect rent, let heirs inherit
- You have to die to get it — not a strategy you can "use" during life
- Estate tax may apply on very large estates (2024 exemption ~$13.6M per person)
- No step-up if you gift the property during life
Watch Out
- Estate planning risk: If property is in an irrevocable trust or LLC with complex ownership, the step-up may not apply to all interests — get an estate attorney review
- Valuation risk: IRS can challenge the "fair market value" claimed at death; get an appraisal for valuable properties
- State law risk: Community property rules vary; ensure your state treats your ownership structure correctly
- Gift trap: Gifting property to avoid probate can cost your heirs the step-up — sometimes probate is cheaper than the lost tax benefit
Ask an Investor
The Takeaway
The step-up in basis is the ultimate tax exit for buy-and-hold investors. By holding until death, you pass property to heirs with a basis reset to market value — zero capital gains, zero depreciation recapture. It's not a tactic you deploy; it's the endgame. Structure your entity structuring and estate planning so your heirs inherit cleanly, and don't gift appreciated property during life if the step-up matters.