Learn how inherited property basis is generally set at date-of-death value, which exceptions apply, and what records support a later sale.
Inherited property basis is the tax value assigned to property received from a decedent. It is generally the property's fair market value on the date of death, although alternate valuation, special-use valuation, basis-consistency rules, community property, IRD, and other exceptions can change the result. Basis helps determine later gain, loss, and depreciation.
Property purchased during life normally begins with cost basis and is adjusted for improvements, depreciation, and other events. Property acquired from a decedent generally receives a basis tied to value at death under Internal Revenue Code Section 1014. The adjustment can increase or decrease basis.
For appreciated property, this is commonly called a step-up. If the property declined, the same rule can create a step-down. "Step-up" should not be used as though basis always increases.
Assume Lucia's father bought a rental home for $180,000. After improvements and depreciation, his adjusted basis is $150,000 when he dies. A qualified appraisal values the property at $500,000 on the date of death.
Lucia's initial inherited basis is generally $500,000, not her father's $150,000 basis. She later spends $20,000 on capital improvements and sells the property for $560,000 with $30,000 of selling expenses.
Her adjusted basis is $520,000. Her amount realized after selling expenses is $530,000. The resulting gain is generally $10,000 before other adjustments. The mortgage balance and cash received at closing do not determine gain.
Fair market value is generally the price at which willing, informed parties would transact without compulsion. Publicly traded securities may use market data; real estate, businesses, collectibles, and fractional interests often need appraisal analysis.
A property-tax assessment, online estimate, probate inventory, insurance value, or later sale price is not automatically the correct federal fair market value. Preserve the valuation date, property condition, comparable sales, ownership interest, restrictions, and appraisal method.
When a qualifying estate elects alternate valuation on Form 706, inherited basis may use the alternate valuation date—generally six months after death—or an earlier disposition date. The executor, not an individual beneficiary acting alone, makes the election, and statutory requirements apply.
Special-use valuation can apply to qualifying farm or closely held business real property. Conservation easements and other specialized provisions can also affect basis. Beneficiaries should use the value communicated by the executor and reconcile any Form 8971 information.
Basis treatment depends on how property was owned. For qualifying community property included in a deceased spouse's estate, both halves may receive a date-of-death basis adjustment. For other jointly owned property, only the decedent's portion may be adjusted.
Title alone may not prove community or separate character. Acquisition date, source of funds, agreements, domicile, and tracing can matter. California couples should preserve records supporting ownership characterization.
Income in respect of a decedent does not receive a fair-market-value basis step-up. Pretax retirement accounts, unpaid compensation, and similar untaxed income rights remain taxable under their own rules.
Another exception can apply when appreciated property was given to the decedent within one year before death and returns to the original donor or the donor's spouse. In that circumstance, carryover basis can prevent a planned round-trip step-up.
Special rules also apply to certain foreign property, tax-deferred accounts, installment obligations, and property outside the decedent-acquired rules.
Inherited capital property is generally treated as held long term when sold, regardless of the beneficiary's actual holding period. Basis does not remain frozen. Capital improvements increase it; depreciation, casualty adjustments, easements, and other recoveries can reduce or otherwise change it.
If inherited property becomes a rental, depreciation is generally based on the appropriate inherited basis allocated between land and building, subject to placed-in-service and fair-market-value rules.
Certain estates required to file Form 706 must provide Form 8971 and beneficiary Schedule A information. Beneficiaries can be prohibited from claiming a basis above the final estate-tax value. Corrections and later adjustments should be preserved.
Not every estate files Form 706 or Form 8971. A beneficiary still needs evidence of date-of-death value. The absence of an estate-tax return does not automatically force the decedent's old basis to carry over.
California basis of inherited property is generally fair market value at death. Federal and California basis can differ because of prior depreciation differences, elections, state nonconformity, or historical adjustments. California Form 593 instructions direct sellers who acquired property by inheritance to determine an appropriate non-cost basis.
California taxes capital gains at ordinary state income-tax rates. Preserve both federal and California basis schedules when they differ.
Heath Income Tax helps beneficiaries and fiduciaries reconcile date-of-death value, improvements, depreciation, and sale reporting. Contact our Santa Maria office before selling or depreciating inherited property.
Is inherited property taxable when received?
The inheritance itself is generally not income. Later rent, dividends, interest, business income, or sale gain can be taxable.
Does inherited property always receive fair-market-value basis?
That is the general rule, but IRD, recent returned gifts, alternate valuation, special-use valuation, and other exceptions apply.
What if no Form 706 was filed?
Date-of-death fair market value can still be the general basis. The beneficiary should obtain defensible valuation evidence.
Is the sale automatically long term?
Inherited capital property is generally treated as held long term, but character and special property rules still matter.
The definitions and examples on this page are for informational purposes only and do not constitute tax advice. Tax laws change frequently and individual circumstances vary. Consult a qualified tax professional before making decisions based on this content.
Click a question or ask us your own.
Ask Us a Question
Message Sent!
Thank you — we'll get back to you as soon as possible.