Step-Up in Basis After Your Spouse Dies: Which Assets Reset and Which Don't

One of the most valuable tax rules available to a surviving spouse — and one of the least understood. Here's exactly how it works, which assets qualify, and what to do with the window before it closes.

What "step-up in basis" means

When you inherit an asset, its cost basis — the value used to calculate capital gains when you eventually sell — resets to the fair market value on your spouse's date of death.¹ This is called a "step-up in basis" because the basis is stepped up from the original purchase price to today's value.

The practical result: if your spouse bought 500 shares of a stock in 1995 for $20/share ($10,000 total) and it's worth $80,000 at death, your new basis is $80,000. If you sell the day after they die, your capital gain is zero — not $70,000.

For widows who inherit accounts and assets accumulated over decades of marriage, this can eliminate tens or hundreds of thousands of dollars in capital gains tax.

Community property vs. common law states — it's very different

Community property states: both halves reset

In the nine community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — assets acquired during marriage are owned equally by both spouses. Under IRC §1014(b)(6), when one spouse dies, both halves of community property receive a new basis — not just the deceased spouse's share.¹

Example (community property state):
A joint brokerage account holds $300,000 of appreciated stock. Original cost basis: $60,000 combined. At death, the entire $300,000 becomes the new basis. If you sell the following week, capital gains tax: $0.

Five additional common law states — Alaska, Florida, Kentucky, South Dakota, and Tennessee — allow married couples to opt into a community property arrangement via a community property trust. Assets titled in that trust may qualify for the full double step-up. This requires planning in advance of death; you can't retroactively elect it after the fact.

Common law states: only half resets

In every other state, property held jointly by married couples is typically joint tenancy with right of survivorship (JTWROS). Only the deceased spouse's half of a JTWROS asset gets a step-up.²

Example (common law state):
Same joint brokerage account: $300,000 value, $60,000 cost basis ($30,000 per half). At death: the deceased's half steps up to $150,000. Your half stays at $30,000. New combined basis: $180,000 ($30,000 + $150,000). If you sell, your gain is $120,000, not zero.

Assets held solely in the deceased spouse's name (not JTWROS) typically receive a full step-up on the entire value, because 100% is includible in the gross estate.

Assets that qualify for step-up in basis

What "IRD asset" means and why it matters

Income in Respect of a Decedent (IRD) refers to income your spouse earned or was entitled to but hadn't yet recognized for tax purposes. IRAs and 401(k)s are the largest IRD assets most families hold: the pre-tax contributions and growth were never included in anyone's taxable income, so the IRS is still owed that tax — step-up doesn't change that. Under IRC §691, IRD assets don't receive a basis adjustment at death.³

There is an IRD deduction (IRC §691(c)) — if the IRD was included in the gross estate and estate tax was owed, you can deduct the estate tax attributable to the IRD asset as income-tax deductions when distributions come out. With the 2026 estate exemption at $15,000,000 per individual ($30,000,000 combined with portability),⁴ few surviving spouses will owe estate tax, which means the IRD deduction is rarely applicable in practice.

The 2026 capital gains rates for single filers

Once you're filing as a single filer, these are your federal long-term capital gains rates:⁵

• 0% on LTCG income up to $48,350 (single filer, 2026)
• 15% on LTCG income from $48,351 to $533,400
• 20% on LTCG income above $533,400
• +3.8% NIIT on top if your MAGI exceeds $200,000 (single)

Compare that to the year-of-death MFJ rates: 0% up to $96,700, 15% to $600,050. The 0% bracket is roughly twice as wide in your last joint-filing year — which creates the opportunity described below.

What to do in the year of death: the joint-year window

The year your spouse dies is your last chance to file jointly (MFJ). That year's wider brackets create a window that won't exist afterward. Strategies to consider with your advisor:

1. Harvest capital gains at 0%

If your taxable income (including gains) falls below $96,700 MFJ, you can sell appreciated positions — even those that already got a step-up — at 0% federal capital gains tax. For a 67-year-old widow whose primary income sources are Social Security (~$30K) and a small pension (~$15K), this window can be surprisingly large.

2. Identify and document the new basis immediately

For every brokerage account and real estate parcel you're inheriting, the date-of-death fair market value becomes the new basis. Your broker is required to update basis records for securities, but you should confirm it was done correctly. For real estate, get a professional appraisal done within a few weeks of death — the estate return (if required) and any future sale both depend on it.

3. Sell low-basis positions if you've been holding them "forever"

Positions your spouse held since the 1990s or early 2000s that have massive embedded gains — the step-up eliminated those gains. If you didn't want to sell before because of the tax cost, that concern is gone. Now evaluate them on their merits as investments, not tax-locked legacy positions.

4. Don't confuse the brokerage step-up with the IRA situation

Many families hold the majority of their assets in IRAs. Those don't reset. The right move for an inherited IRA (spousal rollover, inherited account, or Roth conversion) is a separate set of decisions — see Inherited IRA Rules for Surviving Spouses and Roth Conversion Strategy for Widows.

How to get the step-up properly documented

1. Securities accounts: Contact each broker or custodian with a death certificate. Request confirmation that cost basis has been updated to date-of-death FMV for the inherited positions. Most major custodians do this automatically once beneficiary processing is complete — but confirm, don't assume.
2. Real estate: Commission a formal appraisal, dated as close to the date of death as possible (IRS allows a six-month alternate valuation date in some cases for estate purposes). Retain this appraisal permanently — you'll need it when you eventually sell.
3. Closely held business interests: A qualified business appraiser should determine the date-of-death value. This is required for the estate return if the estate exceeds the exemption, and useful regardless for establishing basis.
4. Community property disputes: If there's any question about whether assets are community or separate property (pre-marital, inherited individually, etc.), document the classification now rather than trying to reconstruct it at sale.

Inherited carryover losses from your spouse

If your spouse had capital loss carryforwards on their final tax return, those losses do not transfer to you. You can only use losses against gains on your spouse's final individual return. Joint-filer loss carryforwards from prior years are split based on who generated them — the portion attributable to your late spouse disappears; your portion continues.⁶

Common mistakes

• Assuming all assets got a step-up. IRAs and 401(k)s absolutely did not. Treating an inherited IRA as if it has no tax cost is an expensive error.
• Doing nothing and letting the window close. The year-of-death joint tax return is one tax year. Strategies like Roth conversions, capital gains harvesting, and income acceleration can only happen in that year. Missing it is permanent.
• Not getting a real estate appraisal. Without a documented FMV at date of death, you'll have a harder time claiming the step-up when you eventually sell. Memories are not evidence.
• Selling IRA assets to "avoid" inheriting them. No mechanism does this for a surviving spouse. You inherit what you inherit. The question is what to do with it next.
• In common law states: assuming JTWROS means full step-up. Only the deceased's 50% steps up. A common mistake when dealing with a long-held joint brokerage account.

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