• Internal Revenue Code §1014 generally adjusts the tax basis of inherited property to its fair market value at the date of death.
• The step-up in basis can eliminate built-in capital gains and depreciation recapture accrued during the decedent’s lifetime.
• §1014 applies broadly to real estate, partnership interests, and other capital assets included in a decedent’s estate.
• Step-up planning is a cornerstone of long-term real estate, §1031, and §721 strategies.
What It Is
Section §1014 provides that the tax basis of property acquired from a decedent is generally adjusted to the property’s fair market value as of the date of death (or the alternate valuation date, if elected). This adjustment effectively resets the property’s basis, eliminating previously deferred capital gains and depreciation recapture for heirs who subsequently sell the asset.
Historical Context
Section §1014 reflects Congress’s long-standing approach to taxing wealth transfers at death differently than lifetime transfers. Rather than carrying over the decedent’s historical basis, lawmakers chose to reset basis to fair market value, simplifying administration and preventing double taxation of appreciation that may have been subject to estate tax.
Over time, §1014 has remained a foundational element of estate planning despite periodic legislative scrutiny. Its durability underscores its importance in long-term planning for real estate investors and closely held business owners.
Commercial Real Estate Context
A commercial real estate investor accumulates significant appreciation over decades through ownership, depreciation, and tax deferral strategies such as §1031 exchanges or §721 contributions. Upon the investor’s death, the inherited property or partnership interests generally receive a step-up in basis under §1014. As a result, heirs may sell the assets shortly thereafter with little or no capital gains or depreciation recapture tax, effectively resolving decades of deferred tax exposure.
Potential Benefits & Limitations
Potential Benefits
• Elimination of Deferred Gain – Resets basis to fair market value, eliminating built-in capital gains and §1250 depreciation recapture.
• Powerful Estate Planning Tool – Complements long-term §1031 and §721 strategies by resolving deferred tax at death.
• Simplified Heir Outcomes – Provides heirs with clean basis and greater flexibility for future disposition or restructuring.
Potential Limitations
• Applies Only at Death – Step-up in basis is not available for lifetime gifts, which are governed by §1015 carryover basis rules.
• Subject to Legislative Risk – §1014 has historically been subject to political scrutiny and potential reform proposals.
• Estate Tax Considerations – Step-up does not eliminate potential estate tax exposure for large estates.
Application
In practice, §1014 serves as the final resolution mechanism for long-term real estate tax deferral strategies. Investors often use §1031 exchanges, accelerated depreciation, and §721 contributions during their lifetime to preserve and grow capital, with the expectation that deferred tax liabilities will be eliminated through a basis step-up at death. Effective planning requires coordination with estate, trust, and succession strategies to fully realize these benefits.