Grief Comes First.
Then Comes the Tax Reset.
One quiet rule in the tax code can erase decades of capital gains. Here is how to make it work for you. · Rodd R. Miller, CFP®
Imagine you lost your spouse or parent recently. After the grief, one financial idea is worth learning about, because it can save your family a great deal in taxes: the step-up in basis.
THE BASICS
What Is Step-Up in Basis?
“Basis” is what you paid for something. When you sell, you pay capital gains tax on the difference between your basis and the sale price.
A NORMAL SALE (NO DEATH INVOLVED)
- A couple bought stock for $5,000 and sells it years later for $30,000.
- Their taxable gain is $25,000.
When someone dies, the basis of most things they owned resets, or “steps up,” to its market value on the date of death. The growth that happened during their lifetime will never be taxed.
WHO BENEFITS
Who Is It For?
Anyone who inherits property that grew in value: spouses, children, or other heirs. For a surviving spouse, how much steps up depends on where you live. Nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) are community property states. There, assets a couple owned as community property get a full step-up on both halves when the first spouse dies. In the other states, only the deceased spouse’s half resets.
SIDE BY SIDE
Community Property vs. Other States
Say a couple bought stock together for $5,000. When one spouse dies, it’s worth $30,000, and the survivor sells it.
COMMUNITY PROPERTY STATE
- Both halves step up to $15,000 each.
- New basis: $30,000
- Taxable gain on a $30,000 sale: $0
OTHER STATES (JOINT OWNERSHIP)
- Deceased’s half steps up to $15,000; survivor’s half stays at $2,500.
- New basis: $17,500
- Taxable gain on a $30,000 sale: $12,500
Same stock, same price, very different tax bill. A few states without community property let couples opt in through a special trust. And community property rules cover assets acquired during the marriage, not those owned before it or inherited.
These rules vary from state to state, and how an asset is titled can change the result. Before relying on a step-up, meet with an estate planning attorney and a CPA licensed in your state to confirm your plan fits local law. We work alongside them to make sure the numbers and the paperwork match.
Two big exceptions everywhere: retirement accounts like IRAs and 401(k)s get no step-up, and neither do assets given away during life. A gift carries the original, lower basis with it.
PROTECTING THE BENEFIT
How Do I Make Sure My Spouse or Child Receives It?
Title matters. In community property states, titling assets as community property (rather than “joint tenancy”) protects the full step-up on both halves. Think twice before gifting highly appreciated assets to children while you are alive; holding them until death usually leaves heirs with a clean slate. And beware the one-year rule: if you give an asset to a dying spouse and it comes back to you within a year, there is no step-up.
YOUR HOME
What Happens to the House, Even With a Mortgage?
While a home steps up its basis on the date of death, a mortgage doesn’t shrink that number; the loan simply stays with the house. Keep making payments. Federal law generally stops a lender from demanding full payoff just because a home passed to a surviving spouse.
Next, record what the home was worth. Contact a real estate agent and ask for a written valuation of the home as of the date of death, based on recent sales of similar homes nearby. Keep it with your tax records. That document becomes your new basis if you sell later, even years from now. For a high-value home, or if an estate tax return will be filed, your CPA may recommend a licensed appraiser instead.
Sell within two years of the death and you may still use the $500,000 married-couple home-sale exclusion.
YOUR VEHICLES
What About a Car, Even With a Loan?
Cars usually lose value over time, so the step-up rarely matters. If there’s a car loan, keep making payments and notify the lender. Then update the title with your state’s motor vehicle office.
INVESTMENTS
Who Figures Out the New Basis on Stocks, Bonds, and ETFs?
Stocks, bonds, mutual funds, and ETFs all qualify. A brokerage firm usually updates cost basis after it receives a death certificate and retitles the account. But check its work: many firms step up only half of a joint account unless told the assets were community property.
RETIREMENT ACCOUNTS
Do IRAs and 401(k)s Get a Step-Up?
No. Traditional IRAs and 401(k)s hold money that has never been taxed, so there is no gain to erase. Every dollar is taxed as ordinary income when it comes out, whether you or your heirs withdraw it.
TIMING
What If the Court Takes Months to Hand Things Over?
That’s normal. The new basis is generally locked in on the date of death, not the day the court or brokerage transfers the asset. Any rise or fall after that date is a new gain or loss for you. In the meantime, keep paying bills, keep receipts, and avoid moving money between accounts.
“The tax code gives grieving families one rare gift. The step-up in basis is only valuable if someone documents it.”
— Rodd R. Miller, CFP®
HELPFUL HINTS
What to Do, and What Not to Do
DO
- Order 10 or more certified death certificates.
- Save date-of-death statements for every account.
- Get appraisals for real estate and business interests.
- Ask your CPA whether to file an estate tax return.
- Update your own beneficiaries and estate plan.
DON'T
- Rush to sell the house or investments.
- Retitle accounts before values are recorded.
- Cash out an inherited IRA without a tax plan.
- Trust that the brokerage’s basis is correct.
- Answer unexpected calls asking for account details.
Above all, give yourself time. Few decisions must happen in the first 90 days. But do keep a record of the date-of-death value of every asset. You may not need it this year, but when you sell something years from now, that number will decide your tax bill. When you’re ready, we’ll act as your Family CFO and coordinate with your CPA and estate attorney, so nothing falls through the cracks.
Sources: Internal Revenue Code §1014 (basis of property acquired from a decedent), including §1014(b)(6) (community property) and §1014(e) (one-year rule); IRC §121(b)(4) (home sale exclusion for surviving spouses); IRS Publication 551, Basis of Assets. Examples are hypothetical and for illustration only. Tax rules depend on your specific facts and may change.
Miller Wealth Management is not an attorney or certified public accountant, and we do not provide legal, tax, or accounting advice. This article is produced for informational and educational purposes only and should not be relied on as legal or tax advice for your situation. Property, probate, and tax laws, including community property rules, differ by state and change over time. Before taking any action, consult a qualified estate planning attorney and CPA licensed in your jurisdiction, who can review your specific circumstances.