How to Avoid Capital Gains Tax at Death for Married Couples

What the Step-Up in Basis Means for Married Couples

When a spouse dies, the cost basis of the assets they owned generally resets to fair market value on the date of death. That single adjustment, found in IRC Section 1014, can erase decades of unrealized gain and the capital gains tax that would come with selling.

Here's what that looks like in dollars. Say John and Mary bought shares in 2005 for $50,000. By the time John dies in 2026, those shares are worth $500,000. Without a step-up, selling them would trigger tax on $450,000 of gain. With the step-up, the basis resets toward that $500,000 value, and the built-in gain that would have been taxable largely disappears. At a 20% long-term capital gains rate plus the 3.8% net investment income tax, that difference can be worth roughly $100,000 or more.

The step-up applies regardless of whether any estate tax is owed. The 2026 federal estate and gift tax exemption is $15 million per person, twice that for a married couple, and it was made permanent by the One Big Beautiful Bill Act. Because fewer than one percent of families face federal estate tax, income tax planning around the step-up now matters far more than estate tax planning for most couples.

This is a conversation worth having together. How you hold your home, your brokerage account, and your rental property, and what you want to pass on, is a shared decision about your assets and your legacy, not a task for one partner to handle alone.

How the Step-Up Works Under IRC Section 1014 in 2026

The basic rule is short: the basis of property acquired from a decedent equals the fair market value on the date of death. The executor can instead elect the alternate valuation date under Section 2032, which uses values six months after death if that produces a lower estate value. Heirs also receive automatic long-term holding period treatment, so inherited assets qualify for the lower long-term capital gains rates even if sold shortly after death.

Reporting has gotten stricter. Under Section 1014(f) and Reg 1.1014-10, finalized in 2024 and corrected in March 2026, a consistent basis reporting rule requires that an heir's basis not exceed the value reported for estate tax purposes. Estates that file Form 706 generally must also file Form 8971 to report those values to beneficiaries.

The step-up is automatic in concept but not always in execution. Your brokerage may keep reporting the old purchase price, so documenting the date-of-death value often falls to the family. Keeping account statements, appraisals, and closing-price records from the date of death protects the survivor from overpaying tax later.

With the $15 million exemption now permanent, the planning calculus has shifted. Below that threshold, capturing the step-up is essentially free of federal estate tax cost, which is why holding appreciated assets until death is often more tax-efficient than selling during life.

Community Property vs. Common Law and the Double Step-Up

How much you step up depends heavily on your state. In the nine community property states, both halves of community property receive a full step-up when the first spouse dies under Section 1014(b)(6). In common law states, only the deceased spouse's half steps up, so the survivor keeps their original low basis on the other half.

The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Five additional states, Alaska, Florida, Kentucky, South Dakota, and Tennessee, let couples opt in through a community property trust, which can extend the double step-up to residents of common law states.

Titling matters, and it matters before the first death. Assets must be titled and documented as community property for the full double step-up to apply. Title them the wrong way and the survivor keeps half the old basis and pays tax on decades of growth. These mistakes are common, expensive, and almost always permanent, which is why an estate attorney should review your titling well in advance.

Which Assets Get a Step-Up and Which Do Not

Most taxable, appreciated property qualifies. Stocks, bonds, mutual funds, and exchange-traded funds held in a taxable brokerage account all receive a basis adjustment, so heirs can sell or rebalance without capital gains tax on pre-death appreciation. Primary residences, vacation homes, and investment property qualify too. For rental property, the step-up is especially valuable because heirs restart depreciation deductions based on the higher stepped-up value.

Some assets get no step-up. Traditional IRAs, 401(k)s, annuities, deferred compensation, unpaid wages, and accrued interest are income in respect of a decedent under Section 691. These retain their built-in ordinary income character and are taxed at rates up to 37% when distributed, no matter who inherits them.

The treatment of gifts is different, and it catches people off guard. Gifted assets carry the giver's original low basis, while inherited assets get the step-up. That's why appreciated property is generally better left at death than given away during life. If you gift a low-basis stock, your heir inherits the low basis along with it.

There's also a trap for well-meaning families. The Section 1014(e) boomerang rule denies a step-up when appreciated property is gifted to someone who dies within one year and the property returns to the original donor or the donor's spouse. Planning that moves assets to an ailing relative to capture a step-up can fail if it happens inside that one-year window.

Strategies Married Couples Use to Plan for the Step-Up

Common law couples aren't shut out of a second step-up. A QTIP trust (qualified terminable interest property trust) can produce a double basis step-up over two deaths. Assets go into a revocable trust that benefits both spouses, get a first step-up at the transferor spouse's death, remain in trust for the surviving spouse, and can be included in the survivor's estate for a second step-up when they die. The executor makes a QTIP election on the estate tax return to make this work.

Couples in the five opt-in states can use a community property trust to reach the full double step-up on the first death, matching what residents of the nine community property states get automatically.

The step-up also stacks with the home-sale exclusion. A surviving spouse can generally claim the larger $500,000 exclusion for a limited time after the first spouse's death, and that exclusion applies on top of the stepped-up basis. The two rules operate independently, which can eliminate gain on a long-held family home almost entirely if the timing is handled correctly.

Coordinating titling, trusts, and asset location works best as one plan rather than three separate errands. Neptune pairs couples with estate attorneys, CFPs, and CPAs who work together so your beneficiary designations, deed titling, and trust language all point the same direction. Neptune's flat-fee estate planning bundle starts at $3,000, and you can see the process at the how it works consult path.

As Michael C. Cotugno, Esq., Managing Partner, Neptune Legal, puts it: "For conscious partners, wealth is not merely a collection of assets; it's a powerful tool with the potential for profound purpose." Planning for the step-up is one way couples turn that tool toward the legacy they actually want to leave.