Step-Up in Basis on Inherited Real Estate: The 2026 Rules

What section 1014 says, word for word

Most pages that rank for “step up in basis” paraphrase the rule. It is four short clauses in 26 U.S.C. 1014(a). The basis of property “in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent” is:

• (1) “the fair market value of the property at the date of the decedent's death”;
• (2) if the executor elects alternate valuation under section 2032, the value on that date, which is generally 6 months after death (section 2032(a)(2));
• (3) the special-use value for farm or business real estate elected under section 2032A;
• (4) the decedent’s own basis for the part of land excluded from the estate as a conservation easement (section 2031(c)).

The word “step-up” is not in the statute. The rule works in both directions: a property worth less than the owner paid gets a step-down to the lower value at death, and the loss disappears with it (our reading of 1014(a)(1)).

Section 1014(b) is the list that decides whether the rule applies at all. Revenue Ruling 2023-2 counts “the seven types of property” on it. For real estate, four matter in practice: property passing by will or inheritance (b)(1); property in a trust the decedent could revoke (b)(2) or amend (b)(3); the surviving spouse’s half of community property (b)(6); and anything else included in the gross estate (b)(9), which is how jointly owned property and most trust structures qualify. If a property is not on that list, there is no step-up, however it reached the heir (Rev. Rul. 2023-2, our reading).

Alternate valuation is narrower than it looks. Section 2032(c) allows it only if it decreases both the gross estate and the estate tax, so it cannot be used to raise basis, and an estate that owes no estate tax cannot elect it (our reading of 2032(c)).

Who inherits real estate on an estate tax return: the IRS data

The step-up applies to every estate, but the only official census of what estates hold comes from the federal estate tax return, Form 706, which most estates are not required to file. The IRS Statistics of Income (SOI) Division publishes the totals. Its table for returns filed in 2024, released in July 2026, mostly covers deaths in 2023, when the filing threshold was $12.92 million of gross estate (SOI footnote).

Three things stand out (our reading of the table):

• Real estate is a bigger share of the smaller taxable-size estates. In the $10 million to $20 million band it is 25.7% of the gross estate; above $50 million it falls to 12.3%. Families near the threshold are the ones whose wealth is a house and a few rentals.
• Real estate partnership interests are a category of their own: $14.03 billion on 2,056 returns, which is where interests in syndications, LLCs and funds land. Those are the holdings where the section 754 question below decides how much of the step-up the heir actually feels.
• Most of these estates paid no estate tax. 4,532 of the 7,195 returns were nontaxable, and they reported $26.53 billion of real estate, 22.1% of their gross estate (our sum). The 2,663 taxable returns paid $23.31 billion of net estate tax. For heirs of the nontaxable estates the step-up is the whole tax story.

The year before was larger: 9,024 returns filed in 2023 reported $360.77 billion of gross estate, with real estate at 17.2% (our arithmetic on the 2023 table). Community property was reported on 1,069 returns filed in 2024, for $59.74 billion.

Under the 2025 tax law, the basic exclusion is $15,000,000 for 2026 (Rev. Proc. 2025-32, applying section 70106 of Public Law 119-21), so fewer estates will file at all. The step-up does not depend on it: section 1014 refers to property acquired from a decedent, and the IRS says in Publication 551 that the community property rule applies “whether or not the estate must file a return.”

One rental, eight ways to pass it on

Our own illustration, with stated assumptions and round numbers. A couple bought a rental in 2001 for $300,000 ($60,000 land, $240,000 building) and deducted $220,000 of depreciation over the years, leaving an adjusted basis of $80,000. It is worth $1,400,000 in 2026. Federal tax only; states, selling costs and the owner’s other income are ignored (our arithmetic throughout).

How row A is built: $220,000 at the 25% ceiling of 26 U.S.C. 1(h)(1)(E) is $55,000; the other $1,100,000 at the 20% rate of 1(h)(1)(D) is $220,000; and the 3.8% net investment income tax of section 1411 on $1,320,000 is $50,160, for $325,160. Those are ceilings: a lower-income seller pays less, and for 2026 the 15% rate runs to $613,700 of taxable income on a joint return (Rev. Proc. 2025-32). Row E follows the IRS’s method for a qualified joint interest: the survivor keeps her own half at cost ($150,000) less the depreciation she was allowed on it (assumed $110,000), plus half the value at death ($700,000). How the same sale is taxed without a death is in our capital gains tax on real estate guide and our depreciation recapture walkthrough.

The ranking is the point: the same building produces a taxable gain of $0, $660,000 or $1,320,000 depending only on title and timing.

The one-year rule, and the other one-year rule

Searches for “step-up in basis one year rule” mix two different provisions.

Section 1014(e): the boomerang gift. If “appreciated property was acquired by the decedent by gift during the 1-year period ending on the date of the decedent's death” and it passes back to the donor or the donor’s spouse, the basis is “the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent.” It stops the trick of deeding a low-basis building to a dying parent and inheriting it back with a new basis. It applies only when the property comes back to the donor or the donor’s spouse; if the parent leaves it to someone else, such as a grandchild, section 1014(e) by its terms does not apply (our reading). Section 1014(e)(2)(B) extends it to sale proceeds from the estate or the decedent’s grantor trust to the extent the donor is entitled to them.

Section 1223(9): the holding period. An heir who sells within a year of the death does not have short-term gain. If the basis is set by section 1014 and the property is sold within a year, “then such person shall be considered to have held such property for more than 1 year.”

Depreciation: the recapture that never comes

For a landlord, the step-up does more than reset appreciation. Every dollar of depreciation lowers basis and would come back as gain on a sale, taxed at up to 25% (26 U.S.C. 1(h)(1)(E)). At death, that liability disappears. Section 1250(d)(2) reads: “Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.” Section 1245(b)(2) says the same for equipment and other section 1245 property, and the heir’s basis is the full value under section 1014(a)(1), so there is no depreciated basis left to recapture (our reading).

Two limits. First, depreciation the survivor took on property he or she already co-owned is not wiped out: section 1014(b)(9) reduces the stepped-up basis of property “acquired before the death of the decedent” by the depreciation “allowed to the taxpayer” before the death. The IRS example in Publication 551 (joint tenants, $30,000 cost, $12,000 of depreciation, $60,000 value) ends with a survivor’s basis of $44,000, not $60,000. Second, the heir starts depreciating again from the new basis (the building part only), and that new depreciation is recaptured on the heir’s own sale (our reading).

Spouses: community property gets two step-ups, joint tenancy gets one half

This is where the most money moves for married owners, and it depends on state law.

• Joint tenancy or tenancy by the entirety between spouses. Section 2040(b)(1) includes “one-half of the value of such qualified joint interest” in the estate of the first spouse to die, regardless of who paid for it. Only that half is stepped up; the survivor’s own half keeps its cost basis less depreciation (IRS Publication 551).
• Community property. Section 1014(b)(6) treats the surviving spouse’s half as acquired from the decedent too, provided at least half of the community interest was includible in the decedent’s gross estate. The IRS puts it plainly: “When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property.” Publication 551 lists Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
• Joint tenancy with a child or anyone other than a spouse. Section 2040(a) includes the whole value in the first owner’s estate except the part the other owner can show they paid for. A child added to the deed for convenience, who paid nothing, gets a full step-up on the death of the parent who paid (our reading of 2040(a) and 1014(b)(9)); adding the child was itself a gift of half, which is a separate gift-tax question.

In our example the gap between rows E and F is $660,000 of gain on the same building (our arithmetic).

Trusts: revocable yes, irrevocable grantor trust no

A revocable living trust does not cost the step-up: section 1014(b)(2) and (b)(3) cover property the decedent transferred in trust while keeping the right to revoke or amend it, and the assets are in the gross estate anyway (our reading).

An irrevocable trust is different, and the IRS settled the most common version in Rev. Rul. 2023-2, published in Internal Revenue Bulletin 2023-16 on April 17, 2023. The facts: a completed gift to an irrevocable trust that is a grantor trust for income tax purposes (the grantor pays its income tax) but is designed to stay out of the grantor’s estate. The holding: “the basis of Asset is not adjusted to its fair market value on the date of A’s death under § 1014 because Asset was not acquired or passed from a decedent as defined in § 1014(b).” The basis after death is the same as before it.

That is the trade every estate plan built on such a trust makes: the growth leaves the taxable estate, and the low basis stays with the property (our reading). An irrevocable trust whose assets are included in the estate (for example because the grantor kept a power that pulls them back in) gets the step-up under section 1014(b)(9); which side of that line a trust sits on is a question for the drafting lawyer (our reading). Property later distributed from a non-grantor trust generally takes the trust’s basis (IRS Publication 551, citing section 643).

What does not get a step-up

The installment note deserves a second look, because sellers who financed a buyer, or used an installment structure to spread a gain, often assume the note steps up like the land did. Section 691(a)(4) treats “the excess of the face amount of such obligation over the basis of the obligation in the hands of the decedent” as income in respect of a decedent, so the heir pays the tax the seller deferred (our reading). A retirement account is the same in principle: inherited IRA money is taxed when withdrawn, and the step-up never reaches it; our K-1 versus 1099 guide covers vehicles held in IRAs.

Fund interests: DSTs, REIT shares and partnerships

Much of the real estate in estates is not a deed but an interest in something that owns a deed.

• Delaware statutory trust (DST) interests. Rev. Rul. 2004-86, the ruling that lets DSTs qualify for 1031 exchanges, says an owner of an undivided fractional interest of a grantor trust “is considered to own the trust assets attributable to that undivided fractional interest of the trust for federal income tax purposes.” For basis, an inherited DST interest is therefore a share of the building, and section 1014(a) applies to it as it would to a deed (our reading). That is why “exchange until you die” works for DST holders: the gains deferred through every exchange end at death. See our DST guide and the 1031 exchange rules.
• REIT, interval fund and BDC shares. The heir’s basis in the shares is their value at death under section 1014(a); nothing changes inside the fund (our reading).
• Partnership and LLC interests, including 721 operating partnership units. The heir’s basis in the interest steps up, but section 743(a) says “The basis of partnership property shall not be adjusted as the result of a transfer of an interest in a partnership by sale or exchange or on the death of a partner unless the election provided by section 754 (relating to optional adjustment to basis of partnership property) is in effect” or the partnership has a substantial built-in loss. Without the election, the heir is allocated taxable gain on the partnership’s later sale of a building measured from the partnership’s old basis, and recovers the difference only as a loss when the interest is liquidated or sold (our reading). Under section 754 the election is the partnership’s to file, and once filed it covers that year and all later years until revoked, so it is a standing decision of the sponsor, not something an heir can make. Ask the sponsor in writing. Holders who exchanged a DST into REIT units can read our 721 exchange analysis.

Proving the number: appraisals, Form 8971 and consistency

The step-up is only as good as the value you can show. When an estate tax return is required, section 1014(f) caps the heir’s basis at the value as finally determined for estate tax purposes (or the value on the executor’s statement), and section 6035 makes the executor report those values to the IRS and to each beneficiary. The vehicle is Form 8971 and its Schedule A. The August 2025 instructions say the beneficiary “cannot use a value higher than the value reported on the Schedule A as the beneficiary's initial basis in the property.” The form is due by the earlier of 30 days after the Form 706 due date (with extensions) or 30 days after the 706 is filed, and it is not required when the 706 is filed only to elect portability, for generation-skipping tax purposes or as a protective filing.

The final regulations (T.D. 9991, effective September 17, 2024) dropped a proposed rule that would have given property left off the estate tax return a basis of zero: “the final regulations do not include the zero basis rule.” And under section 1014(f)(2), the consistency rule applies only to property whose inclusion increased the estate tax.

For the much larger number of estates that file no return, nothing is reported to the IRS. The heir carries the burden of showing value at death on a later sale (our reading), which in practice means a date-of-death appraisal, kept with the closing papers for as long as the property is owned.

The “2-year rule” for inherited property

Google shows the question “what is the 2 year rule for inherited property?” on this topic. There is no two-year rule in section 1014. The rule people usually mean is in the home-sale exclusion, section 121:

• Owners: gain on a principal residence is excluded if, in the 5 years before the sale, it was owned and used as the principal residence for 2 years or more (121(a)), up to $250,000, or $500,000 on a qualifying joint return.
• A widow or widower: section 121(d)(2) counts the deceased spouse’s ownership and use, and section 121(b)(4) keeps the $500,000 limit for an unmarried surviving spouse “if such sale occurs not later than 2 years after the date of death of such spouse.” Combined with a step-up on half (joint tenancy) or all (community property) of the house, that usually covers the gain (our reading).
• A child who inherits a parent’s house does not inherit the parent’s 2 years. The child qualifies only by owning and living there 2 of 5 years after inheriting, but with a basis equal to the value at death, a prompt sale usually produces little gain to exclude (our reading of 121(a) and 1014(a)).

A different two-year rule, the related-party rule for 1031 exchanges in 26 U.S.C. 1031(f), does not apply to a disposition after the death of either party; it is covered in our 1031 rules guide.

Will the step-up be repealed?

Not under any law in force on October 11, 2026. The most recent detailed federal proposal we found is in the Treasury’s General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals, dated March 11, 2024: “the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer,” with a $5 million per-donor exclusion, the $250,000 home exclusion extended to all residences, and an effective date for decedents dying after December 31, 2024. Congress did not enact it.

What Congress did enact, Public Law 119-21 on July 4, 2025, went the other way on the estate tax: section 70106 replaced the $5,000,000 base in section 2010(c)(3) with $15,000,000, and “The amendments made by this section shall apply to estates of decedents dying and gifts made after December 31, 2025.” The law’s text does not contain the number 1014 (our search of the saved text), and the 2024 U.S. Code lists the last amendment to section 1014 as Public Law 114-41 of July 31, 2015, which added the consistency rule. California follows section 1014 for state purposes as well, as our California 1031 clawback page explains.

What an heir, or a parent planning, can do with this

If you have inherited real estate:

• Fix the date-of-death value now. Order an appraisal as of the date of death even if no estate tax return is due, and keep it. If the estate filed Form 706, use the Schedule A value; you cannot use more.
• Check how title was held. Community property, joint tenancy with a spouse and joint tenancy with a child give three different bases (rows B, E and F).
• List what does not step up: installment notes, IRAs, property inside an irrevocable grantor trust, anything that came back to you within a year.
• For fund interests, ask the sponsor two questions in writing: the value per unit at the date of death, and whether a section 754 election is in effect.
• For a rental you keep, restart depreciation on the new building basis.

If you own appreciated real estate and are planning:

• Compare a lifetime gift with a bequest on the numbers in our table: a gift carries your basis to the child (row C); a bequest resets it (row B).
• Do not count on the boomerang: a deed to a dying relative that comes back within a year keeps the old basis (row G).
• If you use an irrevocable trust for estate tax reasons, know that its assets keep their basis (row D), and ask your lawyer how the trust deals with that before death.
• Married in a common-law state, ask whether holding title differently changes the basis result for the survivor; the federal rule is in section 2040(b).

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on October 11, 2026: 26 U.S.C. 1, 121, 691, 743, 754, 1014, 1015, 1031, 1223, 1245, 1250, 1411, 2010, 2032, 2040 and 6035, United States Code 2024 edition, Government Publishing Office (govinfo.gov); Rev. Rul. 2023-2 (Internal Revenue Bulletin 2023-16, April 17, 2023), Rev. Rul. 2004-86 (IRB 2004-33) and T.D. 9991 (IRB 2024-40) from irs.gov; IRS Publication 551 (12/2025); Instructions for Form 8971 and Schedule A (08/2025); Rev. Proc. 2025-32; Public Law 119-21 (govinfo.gov); Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals (March 11, 2024); and IRS Statistics of Income, Table 1, Estate Tax Returns Filed in 2024 and in 2023 (24es01fy.xlsx and 23es01fy.xlsx), saved with the script that read them. Real-estate shares, sums and the worked example are our arithmetic, with the assumptions stated. This is analysis of public documents, not investment, legal or tax advice.