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What is a stepped-up basis for inherited real estate?
A stepped-up basis resets an inherited property's taxable baseline from the original owner's purchase price to its fair market value on the date of death. Under IRS Section 1014, heirs who later sell are taxed only on the gain above that date-of-death value, not on the appreciation that built up during the owner's lifetime.
Basis is the number the IRS subtracts from a sale price to measure your taxable gain. For property you buy, basis is generally what you paid plus the cost of improvements. For inherited property, the law replaces that number with the property's value on the day the owner died.
The change is automatic. What is not automatic is proof. The heirs, or the estate's personal representative, need a supportable date-of-death value, which is what a certified date of death appraisal provides.
How does the step-up change the tax on a sale? A worked example
A home bought for $90,000 in 1985 and worth $425,000 on the date of death, then sold for $450,000, produces a taxable gain of $25,000 for the heirs instead of $360,000. The step-up removes the $335,000 that accrued before the owner died.
| Sold soon after death | Sold years later | |
|---|---|---|
| Sale price | $450,000 | $520,000 |
| Stepped-up basis | $425,000 | $425,000 |
| Taxable gain | $25,000 | $95,000 |
| Gain on the old $90,000 basis | $360,000 | $430,000 |
In both cases the step-up removes $335,000 of taxable gain. Only appreciation after the date of death is taxed to the heirs. At an illustrative 15% federal long-term capital gains rate, $335,000 of gain is roughly $50,000 in federal tax, before any state tax. The numbers are for illustration only; every estate depends on its own facts, so confirm the details with your CPA or estate attorney.
What property gets a step-up, and what doesn't?
Real estate that passes at death and is included in the owner's estate generally gets a stepped-up basis. A home given away during life keeps the giver's original basis, and a home owned jointly with a spouse generally steps up only on the deceased spouse's half.
| How the home was held | Heir's basis |
|---|---|
| Owned outright, passes by will or inheritance | Fair market value on the date of death |
| Revocable living trust | Generally fair market value on the date of death, because the trust assets are part of the owner's estate |
| Owned jointly by spouses (including tenancy by the entirety) | Deceased spouse's half steps up to date-of-death value; the surviving spouse's own half keeps its original basis. Maryland is not a community property state. |
| Given to the heir during the owner's life | Generally the giver's original basis, with no step-up (carryover basis) |
| Irrevocable trust | Depends on how the trust is written and whether it is included in the owner's estate; ask an estate attorney |
The gift row matters most to families. Deeding a home to a child before death can give up some or all of the step-up, so talk to an estate attorney before changing a deed.
Can the basis go down instead of up?
Yes. The basis resets to fair market value on the date of death whether that is higher or lower than what the owner paid. If the home was worth less at death than its cost, the heirs' basis steps down.
For example, a home bought in 2006 for $380,000 and worth $310,000 on the date of death gives the heirs a $310,000 basis, not $380,000. That is one more reason the date-of-death value has to be documented accurately, in either direction.
Do heirs pay long-term or short-term capital gains?
Inherited property is treated as held long-term, no matter how soon the heirs sell. Any gain is therefore taxed at long-term capital gains rates, not ordinary income rates.
Selling soon after the owner's death usually leaves little taxable gain, because the sale price tends to land close to the date-of-death value. The longer the heirs hold the property in a rising market, the more post-death appreciation becomes taxable, as the second column of the example shows.
Two things lower the taxable gain further. Documented capital improvements the heirs make before selling, such as a new roof, HVAC or kitchen, are added to the stepped-up basis. And selling costs such as agent commissions, transfer and recordation taxes and title fees reduce the net sale proceeds, so a sale close to the date-of-death value often shows little or no gain. If a sale produces a loss, note that a loss on an inherited home the heirs lived in or kept for personal use generally isn't deductible, while one held for rental or investment may be. Your CPA can confirm which applies.
Why does the stepped-up basis need an appraisal?
The step-up applies by law, but heirs have to be able to prove the date-of-death value. A certified appraisal gives the IRS, the Register of Wills and your CPA an independent, documented number to rely on instead of a tax bill, an online estimate or a guess.
- Proof of basis: When the property is sold, the heirs report the sale against the stepped-up basis. If the IRS asks how that number was set, the appraisal is the answer.
- Estate tax reporting: When a federal estate tax return is required, the executor reports the estate tax value to the heirs on Schedule A of Form 8971, and the heirs' basis must be consistent with it. Most estates fall below the federal exemption of $15 million per person in 2026 and file no such return. The step-up still applies either way.
- Maryland filings: Maryland has its own estate tax and a separate inheritance tax, though property passing to a spouse, child, grandchild, parent or sibling is generally exempt from the inheritance tax. Whether or not any tax is due, the real estate is listed at its value in the Register of Wills inventory, and the appraisal supports that value and any state tax filings.
A date-of-death appraisal can be completed months or years after the death, and typically costs $400 to $1,500 depending on the property. See the stepped-up basis guide for the alternate valuation date and Form 8971, and the cost guide for fees by property type.
Common questions
Do I owe capital gains tax if I sell the inherited house right away?
Usually very little. Your basis is the date-of-death value, so you are taxed only on the gain above it. A sale close to that value leaves a small gain or none.
Is the step-up the same as the estate tax?
No. The estate tax is a separate tax on the estate. The stepped-up basis applies to heirs whether or not any estate tax is owed.
What if my parent put my name on the deed before they died?
Adding a child to a deed during life can be treated as a partial gift, which can cost part of the step-up. Talk to an estate attorney before changing a deed.
Does the step-up happen automatically?
Yes, by law. What takes work is proving the value, which is why heirs and executors order a certified date-of-death appraisal.
More articles
Appraisal vs. CMA: Can You Use a Real Estate Agent's Market Analysis for Probate?
What a CMA is, how it differs from a certified appraisal, and why heirs and executors usually need the appraisal for estate and tax purposes.
Can You Get a Retrospective Home Appraisal Years After an Owner Passed Away?
Yes. How a certified appraiser values an inherited home as of a past date of death, what records help, and what limits the work.
What Is a Date of Death Appraisal in Maryland and Why Is It Required?
A certified retrospective valuation as of the day the owner passed. Why heirs and executors need one, with a worked stepped-up basis example.