Step-Up in Basis Under §1014 and Why It Drives Asset Location

Internal Revenue Code §1014 provides that property included in a decedent's gross estate receives a basis adjustment to fair market value as of the date of death. For appreciated capital assets the effect is to eliminate the entire embedded capital gain. For retirement accounts the rule does not apply at all. This single distinction drives the most important asset-location decision in estate planning: which dollars to spend during life, which to give during life, and which to hold to death.

What §1014 does and does not cover

The basis adjustment applies to "property acquired from a decedent" — generally any asset includible in the decedent's gross estate under §§2031–2046. Key categories:

• Receives step-up: taxable brokerage securities, real estate, private business interests, collectibles, partnership interests (subject to §754 election by the partnership), and other capital assets.
• Does not receive step-up: traditional IRAs, 401(k)s, 403(b)s, 457(b)s, annuities, and other "income in respect of a decedent" (IRD) under §691. The beneficiary inherits the decedent's original basis and pays ordinary income tax on the full distribution.
• Step-down also applies. If the asset has depreciated, basis adjusts down. Selling depreciated assets before death (to realize the loss) is generally preferred.

Community property states get a double step-up

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, plus Alaska, Tennessee, and South Dakota opt-in) §1014(b)(6) provides that the entire community property — including the surviving spouse's half — receives a basis adjustment on the first spouse's death. In common-law states only the decedent's half of jointly held property steps up.

Worked example: the $4M brokerage account

A widow holds a taxable brokerage account purchased over thirty years. Cost basis: $400,000. Current fair market value: $4,000,000. Embedded gain: $3,600,000.

• If she sells today and gifts cash to children: $3,600,000 long-term capital gain taxed at 20% federal + 3.8% NIIT + state. Tax: roughly $850,000–$1,000,000. Children receive ~$3,000,000.
• If she holds to death and bequeaths the account: Children receive the account at $4,000,000 stepped-up basis. They may sell immediately with zero capital gain. Children receive $4,000,000.
• Delta: Approximately $1,000,000 of preserved wealth, simply by deferring the sale to a moment that will arrive anyway.

The asset-location implications

1. Spend the IRA first; hold the brokerage last. Every dollar withdrawn from the IRA during life is ordinary income. Every dollar of brokerage held to death receives step-up. The textbook withdrawal order (taxable first) reverses the §1014 benefit. See our dynamic withdrawal-order article.
2. Gift cash, not appreciated stock, to children during life. Gifts of appreciated stock carry over basis under §1015. The donee inherits the donor's basis and the donor's holding period. Better to give cash and hold the appreciated stock to death.
3. Donate appreciated stock to charity. Charitable gifts of long-term appreciated securities deduct fair market value and never realize the gain (§170(e)). The §1014 benefit is unnecessary because the gain is eliminated regardless.
4. Concentrate appreciation in the older spouse's name. In a couple with materially different life expectancies, holding appreciated assets in the older spouse's separate name (in a common-law state) accelerates the §1014 reset.

What OBBBA preserved

Step-up has been a recurring target of reform proposals — the Biden administration's 2021 American Families Plan proposed treating death as a realization event for gains over $1,000,000. OBBBA, signed July 4, 2025, did not enact carryover-basis treatment. Section 1014 remains in full force. Future legislation could change this; current law cannot be assumed permanent for planning purposes.

Common mistakes

• Realizing gains in the year of death. Selling appreciated brokerage shares early in the year of death (before basis steps up) generates avoidable tax. Wait if possible.
• Funding a credit shelter trust with IRA assets. An IRA cannot be directly transferred to fund a marital deduction trust without distribution; doing so accelerates ordinary income. Use taxable assets for the credit shelter.
• Holding low-basis stock at depressed values past death. If a stock has dropped below basis, sell it during life to harvest the loss. Step-down at death wastes the loss.
• Forgetting the §754 election for partnership interests. Without a §754 election, inside basis of partnership assets does not adjust even though outside basis steps up. The successor partner loses depreciation deductions.

Sources

• Internal Revenue Code §1014, basis of property acquired from a decedent: law.cornell.edu/uscode/text/26/1014
• Internal Revenue Code §691, income in respect of a decedent: law.cornell.edu/uscode/text/26/691
• Internal Revenue Code §170(e), charitable contribution of appreciated property: law.cornell.edu/uscode/text/26/170
• Internal Revenue Code §754, partnership basis adjustment election: law.cornell.edu/uscode/text/26/754
• IRS Publication 559, Survivors, Executors, and Administrators: irs.gov/pub/irs-pdf/p559.pdf

Account-by-account spend-down order changes how much your heirs receive. Explore the free educational tool.