Step-Up in Basis When a Spouse Dies: How This Tax Rule Protects Survivors
- Andrew Casteel CFP®
- 16 minutes ago
- 14 min read
Losing a spouse brings a flood of decisions, and many of them touch money: the house, the brokerage account, the years of savings you built together. If you are wondering how much tax you would owe by selling any of it, take a breath.
The tax code has a built-in protection for survivors, and in many cases it can save you a great deal.
Disclosure: The scenarios included are hypothetical illustrations used to demonstrate planning concepts. They do not represent the experience of actual clients. Hypothetical financial planning illustrations have inherent limitations, including that they are prepared with the benefit of hindsight and do not reflect actual results of any specific client situation.
When a spouse dies, the cost basis of the assets they owned generally resets to the fair market value on the date of death (IRC §1014). This "step-up in basis" can erase decades of unrealized gain.
It can sharply reduce—or even eliminate—the capital gains tax a survivor owes if they later sell the home, the investments, or other appreciated property.
Key takeaways
When a spouse dies, eligible assets can reset to date-of-death fair market value (IRC §1014) — wiping out the gain that was built up while your spouse was alive.
How much you step up depends on your state. Community-property states generally step up the whole asset. Common-law states generally step up only the deceased spouse's half.
The step-up and the home-sale exclusion are independent and stack — and the larger $500,000 exclusion is time-limited for survivors.
The step-up is automatic in concept but not always in execution. Your brokerage may report the old basis, and you may need to document date-of-death value yourself.
Not everything steps up. Traditional IRAs and 401(k)s do not.
The 2026 estate-tax exemption ($15 million, $30 million for a married couple) and the step-up itself both remain in place.
This article is general education, not individualized tax or legal advice. The rules are state- and fact-specific, so use it to get oriented, then confirm your own situation with a tax or estate professional.
What "step-up in basis" actually means (and why it matters when a spouse dies)
To see why this rule helps survivors, it helps to know three plain-English ideas: cost basis, capital gain, and the reset that happens at death.
Cost basis, capital gains, and the date-of-death reset, in plain English
Your cost basis is what you "paid" for something in the eyes of the IRS — usually the original purchase price, plus certain costs. (Fidelity, What is Cost Basis). When you sell, you owe capital gains tax on the difference between your basis and the sale price.
These gains can be treated differently depending on how long an asset has been held. (IRS, Capital Gains and Losses).
Buy a stock for $100,000, sell it for $400,000, and you generally have a $300,000 gain that can be taxed.
Here is the protection. When the owner dies, the basis of the property they owned generally "steps up" to its fair market value on the date of death (Tax Foundation).
The gain that built up during their lifetime can escape income tax on the stepped-up portion. In limited cases, an estate can instead elect an "alternate valuation date" six months after death.
That choice applies only when a federal estate-tax return (Form 706) is filed, which is true for very few estates.
A simple before-and-after example
Suppose one spouse bought a stock years ago for $100,000, and it is worth $400,000 on the date of death. Without the step-up, selling it could mean paying taxes on a $300,000 gain. With the step-up, the basis resets to the fair market value on the date of death of $400,000.
If the survivor then sells six months later for $410,000, the taxable gain may be only about $10,000 — not $300,000. Same stock, but a very different tax bill.
That is the power of the rule. How much of an asset steps up, though, depends on where you live.
The example above is hypothetical and for illustration only. It assumes a single asset and ignores state taxes. It uses simplified, stated assumptions, does not reflect any specific person's situation, and is not a prediction of the tax outcome in any actual case. Cost basis, fair market value, state law, filing status, and selling costs vary, and your result will differ. Confirm your own facts with a qualified tax professional.
Half or full? Why your state decides how much steps up
This is the biggest variable in how much a survivor saves, and it surprises a lot of people. The amount of a jointly owned asset that steps up depends on whether you live in a community-property state or a common-law (separate-property) state.
Common-law states: only the deceased spouse's half steps up
In most states, when spouses own an asset jointly either by the entirety or as joint tenants with the right of survivorship as a married couple, only the deceased spouse's half resets to date-of-death value. Your half keeps its original basis. The IRS calls this a "qualified joint interest." (IRS Publication 551).
Here the survivor's new basis equals their own original basis on “their half” of the home, plus one-half of the date-of-death value that covers the deceased spouse’s half. (IRS Pub. 523, Home Inherited).
The IRS gives a clean example. Say a jointly owned asset had a $50,000 original basis and is worth $100,000 at death. The survivor's new basis becomes $75,000 — half of the old $50,000 basis ($25,000) plus half of the $100,000 value ($50,000) (IRS Pub. 523, pg. 11).
Real gain can still be left on the half that did not step up. So the "tax-free" framing you sometimes see online does not hold true in every situation.
Community-property states: the "double step-up"
In community-property states, the result is generally more generous. The entire community-property asset — including the survivor's half — generally gets a new basis at the first spouse's death (IRS Pub. 523, pg. 11). Using the same example, that $100,000 asset could step up to a full $100,000 basis, not $75,000.
The nine community-property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin (IRS Publication 551).
One caveat from the IRS: at least half the value generally must be includible in the deceased spouse's gross estate for the full step-up to apply.
Community-property declarations and titling (this step is often missed)
Here is a nuance that general articles tend to skip. We often work with couples who relocate between community-property and common-law states, or who simply never reviewed how their accounts are titled. In those cases, we frequently see surprise about how much basis actually resets.
Some financial institutions default to stepping up only 50% of a jointly held account. They may ask the survivor to request the full 100% step-up, sometimes with evidence that the asset was community property.
These institution practices are our experience, not an IRS rule, and they vary. But the lesson is the same.
A community-property declaration, or a careful look at how assets are titled while both spouses are living, can help make sure the correct step-up is captured later. This is the kind of detail a fiduciary planning lens catches.
Selling the family home: the step-up AND the $500,000 exclusion
For the family home, one question comes up again and again: "Do I get the step-up, or do I get the home-sale exclusion?" The reassuring answer is that these are two independent rules, and they typically stack. You do not have to choose.
Two rules that work in order
Think of it as two steps, in this order:
Reset the basis. At your spouse's death, the home's basis steps up to date-of-death value — fully or by half, depending on your state (as discussed above).
Apply the home-sale exclusion to what is left. Under Section 121, you may then exclude up to $250,000 of remaining gain if you file single, or up to $500,000 if you qualify for the higher survivor amount (IRS Topic 701; Publication 523). The exclusion applies to the gain that remains after the step-up.
Read more about the Tax Consequences of Selling a House After the Death of a Spouse.
You inherited it — now what? Making the step-up actually happen
This is where survivors get tripped up a lot of the time, and where a little knowledge can go a long way. The step-up is automatic in concept, but it is operationally manual.
The most common real-world snag is simple: the brokerage reports the old cost basis on your tax form, as if no step-up happened. This can happen for many reasons; the simplest being that the brokerage is unaware someone has passed.
Notify the custodian and document date-of-death value before you sell
A clean sequence prevents many problems. Before you sell anything:
Notify the custodian. Tell the brokerage or bank about the death and provide a death certificate so they can begin updating the account.
Document the date-of-death value in writing. Get a brokerage statement, appraisal, or other record that fixes the fair market value on the date of death. You may need to prove this figure years later.
Confirm the basis was adjusted before you transact. Check that the stepped-up basis is reflected before you place a sale, so your records and the broker's line up.
When the 1099-B shows the wrong (old) basis
Consider a hypothetical, composite reader — call her Susan. (Susan is a fictional, composite example used to illustrate a common situation; she is not a real client, and her situation is not a promise of any particular outcome.)
Say Susan is 64 and recently widowed. Her husband had held the same index fund for 25 years, and she needs to sell part of it to cover expenses. When her brokerage sends Form 1099-B, it lists the original purchase price from decades ago — not the stepped-up basis.
On paper, it looks as if she owes tax on a huge gain she did not actually realize. She is frightened, and she assumes the form is the final word.
Luckily, it is not. You can report the correct, stepped-up basis on Schedule D (Form 1040) and Form 8949 if you can substantiate the date-of-death value (Form 8949 Instructions).
In a case like Susan's, that means going back to the date her husband died, fixing the fund's value on that date, and reporting from there.
The framing matters. This is not "the broker is wrong, so ignore the form." It is "keep solid records and report the basis you can document."
Reporting a basis different from the 1099-B can draw IRS attention. So your documentation needs to be solid — another reason to loop in a tax professional.
Choosing which lots to sell after a partial step-up
In a common-law state, a 50% step-up can leave you holding two kinds of shares: some with a high (stepped-up) basis, and some with the original low basis. Selling the stepped-up lots first generally realizes less gain, since their basis is higher.
Holding the low-basis lots defers tax — and may position them for a possible second step-up later (more on that below). Capturing this usually requires "specific-lot identification" rather than an average-cost method, which is worth setting up with your custodian.
This notify-document-then-decide sequence is exactly the kind of thing a fiduciary can help a surviving spouse walk through, so the protection the law intends is actually captured — not lost to a form.
What does NOT get a step-up (and the costly surprises)
Not everything resets, and assuming that all assets do reset can lead to a painful surprise. A few things that people expect will receive step up treatment do not.
IRAs, 401(k)s, and "income in respect of a decedent"
Traditional IRAs, 401(k)s, and similar pre-tax retirement accounts do not receive a step-up. They are treated as "income in respect of a decedent." The character of the income follows through from the decedent to the person who inherited the account.
That means the accounts that would have been ordinary income to the decedent are taxed as ordinary income when withdrawn — not as capital gains, and with no basis reset (IRS Publication 559, pg 14, IRC §691).
A surviving spouse generally can roll an inherited IRA into their own, which preserves more planning flexibility. Because these accounts do not get the step-up, strategies like Roth conversions during life or thoughtful beneficiary planning can matter more, not less.
Gifts and assets in irrevocable trusts
Two more common surprises:
Lifetime gifts. Assets given away during life generally take a carryover basis — the giver's original basis — rather than a step-up (Tax Policy Center). The instinct to "give it away now" can unintentionally cost the family a step-up they would otherwise have received.
Assets in an irrevocable trust. Property moved into certain irrevocable trusts, often as part of Medicaid or asset-protection planning, may forfeit the step-up due to the intricacies of estate laws.
This is not necessarily a mistake — it can be a deliberate tradeoff of a future income-tax benefit for asset protection or eligibility. It is exactly the kind of decision to weigh with an estate attorney before acting.
When planning around traditional IRAs, 401(k)s, 403(b)s and 457s, many annuities, gifted assets, and certain irrevocable-trust assets, keep in mind that the step-up rules may not apply in the same way as some other assets.
Planning ahead: the second step-up and the widow's tax cliff
For couples planning ahead, and for survivors thinking about their own estate, two ideas work together — and we think it is important to connect them.
Hold-to-death versus sell-now for low-basis assets
Property the surviving spouse still owns at their own death is generally eligible for a second step-up, to its value on that later date. That is why holding highly appreciated, low-basis assets can be tax-efficient: the gain may step away again. (Fidelity).
The case for holding has limits, though. You may need the cash, or a single stock may be too large a slice of your wealth. And tax law can change, so a future step-up is never guaranteed. It is a genuine tradeoff, not an automatic always applicable answer.
The shift to single brackets after the year of death
Here is the catch that often goes unspoken — sometimes called the "widow's penalty." A surviving spouse may generally file married filing jointly in the year of death. After that, they usually file as single (unless they qualify as a surviving spouse with a dependent).
Single filers face narrower tax brackets and a smaller standard deduction. So the same income can be taxed more heavily than before. (Holistiplan, Widow’s Tax Penalty).
That single-bracket shift can change the math on whether to sell low-basis assets now or hold them.
In our planning work with surviving spouses, we weigh the value of holding for a potential second step-up against the reality of moving into single brackets — and the right answer depends on each individual’s specific facts.
Estate tax, the 2026 exemption, and "is the step-up going away?"
If you have read older articles warning that the estate-tax exemption was about to drop or that the step-up might be repealed, you can set that worry down. Those headlines are out of date.
OBBBA, the $15 million exemption, and portability
The One Big Beautiful Bill Act (OBBBA) was signed July 4, 2025. It made the federal estate-tax exemption permanent and set it at $15 million per person for 2026 (up from $13.99 million in 2025). It also did not repeal the §1014 step-up in basis. For the large majority of families, no federal estate tax is owed at all.
It also helps to separate two taxes people often confuse. Estate tax applies to a large estate's total value at death. Capital gains tax applies when you later sell an appreciated asset—and that is where the step-up does its work.
Because the estate-tax exemption is so high, the vast majority of estates owe no federal estate tax. For families the relevant tax is usually any applicable capital gains tax.
Two more tools support married couples. The unlimited marital deduction generally lets assets pass to a surviving spouse free of federal estate tax.
And portability lets the first spouse's unused exemption pass to the survivor (the "DSUE"). But this works only if the estate files a timely Form 706 — even when the estate is below the normal filing threshold (IRS estate-tax FAQ).
Tax figures and rules in this article are current as of June 2026 and are drawn from IRS sources. Tax law can change, and several of these provisions could be amended in the future. State income, estate, and inheritance taxes vary and may not follow the federal rules described here. This article does not address your state's specific treatment.
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Step-up in basis is a real, built-in protection for survivors. It can erase decades of gain and meaningfully lower taxes on a home or investment account. But capturing its full value is rarely automatic. It depends on your state's rules, the order in which you apply the step-up and the home-sale exclusion, and the documentation behind your basis when a 1099-B shows the old number. Timing matters too, like the two-year home-sale window and the hold-versus-sell decision. The reassurance is genuine. The execution is where it is won or lost.
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Frequently asked questions
Does a surviving spouse get a step-up in basis?
Yes. Assets the deceased spouse owned generally reset to fair market value on the date of death (IRC §1014). How much of a jointly owned asset steps up depends on whether you live in a community-property or a common-law state.
Do I get a full step-up or only half?
In the nine community-property states, the whole community-property asset generally steps up. In common-law states, only the deceased spouse's half steps up, and your half keeps its original basis (IRS Publication 551).
When my spouse dies, do I get the step-up or the $250k home exclusion?
Generally both — they are independent and stack. You reset basis to date-of-death value first, then may exclude up to $250,000 of remaining gain (or $500,000 if you sell within two years of the death and have not remarried) (IRS Publication 523).
Does an inherited IRA or 401(k) get a step-up?
No. Pre-tax retirement accounts are income in respect of a decedent and are taxed as ordinary income when withdrawn; there is no basis reset (IRS Retirement Topics – Beneficiary; IRS Publication 559).
What if the brokerage reports the old cost basis on my 1099-B?
You can report the correct stepped-up basis on Schedule D (Form 1040) and Form 8949 if you can document the date-of-death value (IRS Topic 701). So notify the custodian and get the valuation in writing before you sell.
Which states are community-property states?
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin (IRS Publication 551).
Does the asset step up again when I, the surviving spouse, die?
Generally yes. Property you still own is eligible for a second step-up to its value at your death, which is one reason holding low-basis assets can be tax-efficient.
Did the 2026 estate-tax changes or step-up repeal happen?
No. The estate-tax exemption did not drop — OBBBA made it permanent at $15 million for 2026 — and the §1014 step-up was not repealed (IRS; Tax Foundation).
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About the author:
Chief Investment Officer
Andrew is the Chief Investment Officer for Covenant Wealth Advisors and a CERTIFIED FINANCIAL PLANNER™ practitioner. He has over 11 years of experience in the financial services industry in the areas of wealth management and financial planning for retirement.
Disclosures: Covenant Wealth Advisors is a registered investment advisor with offices in Richmond, Reston, and Williamsburg, VA. Registration of an investment advisor does not imply a certain level of skill or training. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. This article was written and edited by a CERTIFIED FINANCIAL PLANNER™ professional with the assistance of AI. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place. Hypothetical examples are fictitious and are only used to illustrate a specific point of view. Diversification does not guarantee against risk of loss. While this guide attempts to be as comprehensive as possible no article can cover all aspects of retirement planning. Be sure to consult an advisor for comprehensive advice.