The Short Answer
When you inherit an asset, its tax basis (the number used to measure capital gain at a sale) resets to its value on the day the owner died. Sell soon after, and there is little or no taxable gain, even if the original cost was a tiny fraction of today’s value. The step-up effectively erases the tax on a lifetime of appreciation. Almost everything in estate planning, from which deed to use to which assets to gift, turns on protecting it.
An Example That Makes It Click
Maria bought her home in 1990 for $50,000. Today it is worth $400,000.
- Her children inherit it at her death. Their basis steps up to $400,000. They sell for $400,000 and owe capital-gains tax on essentially nothing. The $350,000 of growth is never taxed.
- She deeds it to them during her life instead. They take her old $50,000 basis. When they sell for $400,000, they owe tax on $350,000 of gain, often tens of thousands of dollars that a step-up would have erased.
Same house, same family, same sale price. The only difference is whether the home passed at death or was given away during life. That difference is the step-up.
How to Keep the Step-Up
The rule is simple: let appreciated assets pass at death, not as lifetime gifts. These all preserve the full step-up, because none is a completed gift during life:
- Property that passes through a will or a revocable living trust.
- A home that passes by a lady bird deed, which also keeps it out of probate while delivering the full step-up.
The step-up is lost when you transfer appreciated assets outright while alive, the classic example being a quitclaim deed to the kids, which trades a probate-avoidance goal for a tax bill and can even trigger a Medicaid penalty. See what a lifetime gift really costs on the gift tax calculator →
The Double Step-Up for Married Couples
For most jointly owned assets, only the deceased spouse’s half steps up at the first death; the survivor’s half keeps its old basis. Community property is the exception: the entire asset, both halves, steps up at the first death. Florida is not naturally a community-property state, but a Florida community property trust lets a married couple opt in and aim for that double step-up, which can erase the capital-gains tax on highly appreciated stock or real estate. For a couple sitting on a big unrealized gain, it is one of the most powerful tools available, with one honest caveat covered on that page: the IRS has not formally blessed the double step-up for opt-in trusts.
Sitting on an appreciated home, stock, or business?
Book a free 30-minute consult. We will make sure your plan preserves the step-up, instead of giving it away by accident.
Book your free consultThe Big Exception: Retirement Accounts
One asset does not get a step-up: retirement accounts. IRAs, 401(k)s, and the like pass to your heirs still carrying income tax, because that money was never taxed going in. This shapes good planning: it usually makes sense to leave the appreciated taxable assets (which get the step-up) to your heirs, and to handle retirement accounts differently, often through a spouse, charity, or careful beneficiary planning. Matching the right asset to the right heir can save a family a great deal.
The Florida Angle
Florida has no state income tax, no estate tax, and no inheritance tax, so the only tax to plan around is federal capital-gains tax, and the step-up is the federal rule that minimizes it. That makes Florida a clean place to hold and pass appreciated assets, with tools like the lady bird deed and the community property trust working without a state-tax layer on top. For larger estates, portability handles the separate estate-tax exemption.
Frequently Asked Questions
What Is the Step-Up in Basis?
When you inherit an asset, its tax "basis" (the figure used to measure capital gain when it is sold) resets to its fair market value on the date the owner died. So if you inherit a home worth $400,000 and sell it soon after for $400,000, there is little or no taxable gain, even if the original owner paid $50,000 for it decades ago. The step-up effectively erases the tax on a lifetime of appreciation. It is one of the most valuable breaks in the entire tax code, and most of estate planning is built around protecting it.
How Does Gifting During Life Destroy the Step-Up?
When someone gives you an asset while they are alive, you take their old, low basis (called carryover basis) instead of a stepped-up one. Say a parent bought a home for $50,000 and deeds it to a child during life; the child’s basis is $50,000. If the home is worth $400,000 and the child sells, they owe capital-gains tax on $350,000 of growth that a step-up would have erased. This is the single biggest reason "just put the kids on the deed" is usually a costly mistake.
How Do I Keep the Step-Up for My Heirs?
By letting assets pass at death rather than giving them away during life. Property that goes through a will, a revocable living trust, or a lady bird deed all keeps the step-up, because none of those is a completed lifetime gift. A lady bird deed is especially useful: it keeps your home out of probate and still delivers the full step-up to your children. The mistakes happen when people transfer appreciated assets outright while alive, which trades a probate-avoidance goal for a needless tax bill.
What Is the Double Step-Up for Married Couples?
For most jointly owned assets, only the deceased spouse’s half gets a step-up when the first spouse dies; the survivor’s half keeps its old basis. But community property gets a step-up on the entire asset, both halves, at the first death. Florida is not naturally a community-property state, but its community property trust lets a married couple opt in and aim for that double step-up, which can wipe out the capital-gains tax on highly appreciated stock or real estate. (One honest caveat: the IRS has not formally confirmed the double step-up for these opt-in trusts, so we structure them with that uncertainty in mind.)
Do Retirement Accounts Get a Step-Up?
No. IRAs, 401(k)s, and similar retirement accounts do not get a step-up in basis. Your heirs pay income tax on those distributions just as you would have, because the money was never taxed going in. This is a key planning point: it usually makes sense to leave appreciated taxable assets (which get the step-up) to heirs and to handle retirement accounts differently, often spending them or directing them to a spouse or charity.
Does a Lady Bird Deed Preserve the Step-Up?
Yes, and that is one of its biggest advantages. Because a lady bird deed reserves full control to you for life and makes no completed gift, your home passes at your death with a full step-up to date-of-death value. Your children can sell shortly after with little or no capital-gains tax, and the home never goes through probate. Compare that to deeding the home to them outright, which loses the step-up and can trigger a Medicaid penalty.
Does Florida Tax the Gain or the Inheritance?
Florida has no state income tax, no estate tax, and no inheritance tax, so the only tax in play is federal capital-gains tax, and the step-up is a federal rule that minimizes it. That makes Florida a favorable place to plan around appreciated assets: you are dealing with one layer of tax, not a state layer on top, and the planning tools that preserve the step-up work cleanly here.
Common Situations
The $40,000 mistake. A father deeds his paid-off home to his daughter during his life to "keep it simple." She takes his low basis, and when she sells after his death she owes capital-gains tax on decades of growth. A lady bird deed would have passed the home with a full step-up and no tax.
The long-held stock. A widow holds stock her late husband bought for almost nothing. Because it was community property handled correctly, the whole position stepped up at his death, so she can sell with little capital-gains tax instead of owing on a lifetime of gain.
The right asset to the right heir. A couple leaves their appreciated brokerage account to their children (who get the step-up) and directs their IRA to charity (which pays no income tax on it). Matching assets to heirs saves the family thousands.
Sources of Law
- IRC §1014: basis of property acquired from a decedent (the step-up to date-of-death value); §1014(b)(6): both halves of community property step up at the first spouse’s death. (retrieved 2026-06-08)
- IRC §1012 (cost basis for purchased property); §1015 (carryover basis for gifts); §691 (income in respect of a decedent, why retirement accounts get no step-up).
- Florida imposes no state income, estate, or inheritance tax.
Updated on June 10, 2026. Reviewed by Kevin D. Klagge, Esq., Fla. Bar No. 99502. General information about federal and Florida law, not legal or tax advice, and no attorney-client relationship is created. Tax outcomes depend on your specific facts and on federal law that may change. Do not send confidential information until we have agreed to represent you.