Step-Up in Basis (IRC Section 1014)

Detailed Explanation

A step-up in basis is the rule under IRC Section 1014 that property acquired from a decedent generally takes a new basis equal to its fair market value on the date of death, rather than carrying over the decedent's original cost. The estate can instead elect the alternate valuation date (six months after death) under Section 2032 when it lowers the estate value. The practical effect is that all appreciation during the decedent's lifetime escapes income tax: an heir who sells shortly after death has little or no capital gain because basis and sale price are nearly the same. Inherited property also receives a long-term holding period automatically under Section 1223(9), regardless of how briefly the heir actually held it. The step-up is not limited to US-situated assets or US decedents. Revenue Ruling 84-139 confirms that property inherited from a nonresident alien, located outside the United States and never subject to US estate tax, still receives the Section 1014 date-of-death basis in the hands of a US heir, which is critical for US owners of foreign real estate, including Indian land later contributed to a Joint Development Agreement. A step-up compresses gain but does not change the timing of US recognition, the Foreign Tax Credit analysis, or state tax. Assets that carry income in respect of a decedent (such as traditional IRAs) do not get a step-up.