Tax Basis in Estate Planning: Step-Up, Carryover and Basis Planning in New York

Basis decides how much capital gains tax your heirs pay when they sell. How an asset reaches them, by purchase, gift or inheritance, decides the basis.

Estate planning conversations tend to focus on the estate tax, but for most New York families the tax that actually gets paid is capital gains tax, and the number that drives it is basis. The same $1,000,000 asset can reach a child with a basis of $200,000 or a basis of $1,000,000 depending on whether it is given during life or inherited at death. The difference is $800,000 of taxable gain that either exists or does not.

This page explains what basis is, how it is set for property acquired by purchase, gift and inheritance, which assets receive a step-up at death and which never do, and the techniques we use to make sure low-basis assets get the step-up while high-basis assets do the gifting. The related estate tax comparison is on our capital gains tax versus estate tax page.

What Basis Is

Basis is the figure the tax law uses as your investment in an asset. When you sell, your gain is the sale price minus your basis, and capital gains tax is charged on the gain, not on the price. Basis starts as what you paid and then changes over time: it goes up for capital improvements, such as a new roof or a renovated kitchen, and it goes down for depreciation claimed on a rental property or business asset. The result is called adjusted basis. A landlord who bought a building for $400,000, added $100,000 of improvements and claimed $100,000 of depreciation has an adjusted basis of $400,000. Every basis rule below produces a starting number that is then adjusted the same way.

Three Ways to Acquire Property, Three Basis Rules

1. Purchase: cost basis

Property you buy takes a basis equal to its cost, including closing costs and commissions, adjusted afterward for improvements and depreciation. This is the simple case, and it is the origin of the low basis in most of the family real estate and stock we see.

2. Gift: carryover basis

Property you receive by gift takes the donor’s adjusted basis under § 1015. The gain the donor built up over decades travels with the property to the recipient. There is one special rule for losses: if the property is worth less than the donor’s basis on the date of the gift, the recipient’s basis for computing a loss is the lower fair market value. A gift can therefore never be used to transfer a built-in loss to someone who can use it, while it always transfers a built-in gain.

3. Inheritance: stepped-up (or stepped-down) basis

Property acquired from a decedent takes a basis equal to its fair market value on the date of death under § 1014. Appreciated property is stepped up and the gain vanishes; property that has declined is stepped down and the loss vanishes. If the executor elects the alternate valuation date on the estate tax return, the basis is the value six months after death instead. The rule applies whether the property passes by will, by intestacy, by revocable trust or by beneficiary designation, as long as it is included in the decedent’s estate. Our step-up in basis page has more examples.

Which Assets Get a Step-Up at Death

The test is inclusion in the decedent’s gross estate for estate tax purposes. If the asset is counted in the estate, it gets a new basis, even if the estate is far too small to owe any estate tax.

• Real estate, stock, business interests and tangible property owned outright by the decedent.
• Assets in a revocable living trust. The trust is ignored for tax purposes during the grantor’s life and its assets are included in the estate, so they are stepped up exactly as if owned outright.
• QTIP and marital trust assets at the surviving spouse’s death. Property in a QTIP trust is included in the surviving spouse’s estate under § 2044 and receives a second step-up at that death.
• The decedent’s half of property owned jointly with a spouse. One-half of a jointly owned home or account is included in the first spouse’s estate and stepped up; the survivor’s half keeps its old basis until the survivor dies.
• The includible portion of property owned jointly with a non-spouse. For a joint account or deed with a child, the portion included in the estate is the portion the decedent paid for, and only that portion is stepped up.

Which Assets Do Not

• IRAs, 401(k)s, annuities and other income in respect of a decedent. These are untaxed income the decedent never reported, and the beneficiary pays ordinary income tax on withdrawals. There is no step-up, and the account is still included in the estate for estate tax purposes.
• Assets in a completed-gift irrevocable trust. A SLAT, the remainder of a GRAT after the annuity term, or a dynasty trust holds property that was removed from the grantor’s estate. Because it is not included at death, there is no step-up, even if the trust is a grantor trust whose income tax the grantor has been paying (Rev. Rul. 2023-2).
• Assets in a credit shelter trust at the second spouse’s death. The credit shelter trust is designed to stay out of the survivor’s estate, so its assets are stepped up at the first death and never again. For a credit shelter trust holding a low-basis building for many years, that is a real cost to weigh against the estate tax saving.
• Property gifted to the decedent within one year of death that returns to the donor. Under § 1014(e), the donor takes back the property at the old basis. Transfers to a dying spouse to capture a step-up have to be made more than a year before death.

New York Points

New York follows the federal basis rules. Property inherited from a New York decedent takes its date-of-death value as basis for both federal and New York income tax purposes, and the gain on a later sale is taxed at the New York rates of up to 10.9%, plus up to 3.876% for a New York City resident, on top of the federal 23.8%. We cover those rates on our New York capital gains tax page.

It is important not to confuse the two taxes. The step-up is an income tax concept. It does nothing to reduce New York estate tax, which is charged on the full date-of-death value of the asset if the estate exceeds $7,350,000 in 2026, with the cliff at $7,717,500. A building that receives a full step-up can at the same time be the asset that pushes the estate over the cliff. Conversely, an estate under $7,350,000 owes no estate tax at all and receives the full step-up, which is why lifetime gifts of appreciated property make no sense at that level.

Basis Planning Techniques

Hold low-basis assets until death

The original family building, founder’s stock, and securities bought decades ago should generally stay in the estate. If the estate is under the New York exclusion this is the whole plan. If it is larger, these assets are still the last ones to give away.

Gift cash and high-basis assets

When gifts are needed to bring an estate under the cliff or to use the $15,000,000 federal exemption, give cash, recently purchased securities, or assets whose value is close to basis. The recipient loses nothing because there is little gain to carry over.

Use the swap power in grantor trusts

A grantor trust drafted with a substitution power under § 675(4)(C) lets the grantor exchange high-basis assets or cash for low-basis trust assets of equal value without a sale and without estate inclusion (Rev. Rul. 2008-22). Done before death, the swap moves the low-basis asset back into the estate for a step-up while the trust keeps its value.

Upstream planning with a general power of appointment

Granting an elderly parent, or a trust beneficiary with a small estate, a general power of appointment over low-basis assets includes those assets in that person’s estate and produces a step-up when they die, at no estate tax cost if their estate stays under the exclusions. The risks are exposure to the powerholder’s creditors, the powerholder actually exercising the power in favor of someone else, the § 1014(e) one-year rule for property gifted to them outright, and New York estate tax if the powerholder’s estate turns out to be larger than expected. We draft the power by formula and with a limited class of permissible appointees.

Medicaid asset protection trusts drafted for basis

A home placed in a Medicaid trust is often meant to be protected from nursing home costs while still passing to the children with a step-up. That works only if the trust is drafted so that the house remains in the grantor’s estate for tax purposes, typically through a retained right to live there under § 2036. A Medicaid trust drafted as a completed gift without that retained interest hands the children a carryover basis instead.

Record-Keeping

Basis has to be proven. For property held until death, the estate’s date-of-death appraisal becomes the heirs’ basis, so we obtain a written appraisal for every piece of real estate and every business interest even when no estate tax return is required. Brokerage accounts should be valued as of the date of death and the statement kept with the estate file. For property that will be gifted, the donor’s records of purchase price, closing costs, improvements and depreciation must be handed over with the deed, because the recipient will need them years later to compute the gain. Our page on tax on inherited property explains how heirs report a sale.

Common Mistakes

• Adding a child to the deed. Putting a child on the deed as a joint owner is a gift of half the house with carryover basis. At the parent’s death only the parent’s half is stepped up. Half of the built-in gain is lost, and the child now owns half a house that is exposed to the child’s creditors and divorce.
• Gifting the house outright. Deeding the home to the children to avoid probate or nursing home costs transfers the entire gain to them. If they sell after the parent’s death, they pay capital gains tax that a will, a revocable trust or a properly drafted Medicaid trust would have eliminated.
• Selling inherited property without a date-of-death appraisal. Heirs who sell without establishing the date-of-death value are left arguing basis with the IRS from old records, and some end up reporting the decedent’s original cost.
• Leaving low-basis assets in an irrevocable trust to the end. Assets that were moved to a SLAT or dynasty trust years ago should be reviewed regularly; the ones with the largest gain are candidates for a swap before the grantor’s death.
• Treating retirement accounts like other assets. An IRA left to a high-bracket child is taxed as ordinary income on every withdrawal, while the same value in stock would have passed with a step-up.

Gift vs. Inherit: A $1,000,000 Asset With a $200,000 Basis

For an estate under the New York exclusion, the right-hand column wins outright: $800,000 of gain avoided at death and no estate tax at all. For a larger estate the estate tax on the asset has to be weighed against the capital gains cost, which is the subject of our capital gains versus estate tax page.

How We Help

We begin every estate plan with a basis schedule of the client’s significant assets, so that decisions about wills, trusts and gifts are made with the income tax consequences in view. We draft revocable trusts and Medicaid trusts that preserve the step-up, grantor trusts with swap powers, and general powers of appointment where upstream planning fits. For executors and heirs we arrange date-of-death appraisals and document basis so that a later sale is reported correctly.

Related Estate Tax Planning Topics

• Capital Gains Tax vs. Estate Tax – Decision rules by estate size for New York families weighing a lifetime gift against holding for the step-up.
• A/B Trust – Credit shelter and marital trusts, and which of them receives a second step-up at the surviving spouse’s death.
• Spousal Lifetime Access Trust – A completed-gift grantor trust: no step-up under Rev. Rul. 2023-2 unless the swap power is used.
• New York Estate Tax in 2026 – The $7,350,000 exclusion and the rate table that apply to the full value of stepped-up assets.

Talk to us about basis planning

We build the basis schedule, draft the trusts and powers that preserve the step-up, and document date-of-death values for heirs. Call Albert Goodwin at 212-233-1233 or email [email protected] to review the basis of the assets in your estate.