IRC 1014 and IRC 1015: Basis in Inherited and Gifted Property -- Practitioner Planning Guide

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Key Practitioner Points
  • IRC 1014(a): the basis of property acquired from a decedent is its fair market value (FMV) on the date of death (or the alternate valuation date elected under IRC 2032). The step-up applies only to property included in the gross estate under IRC 2031-2044.
  • Rev. Rul. 2023-2 (IRS guidance, not statute): assets held in an irrevocable grantor trust that are NOT included in the grantor's gross estate do NOT receive a stepped-up basis at the grantor's death. Basis swap and swap-power strategies for irrevocable grantor trusts are directly undermined. Verify current status at IRS.gov.
  • Stepped-DOWN basis: if FMV at death is below the decedent's adjusted basis, the heir takes the lower FMV. This is a planning hazard many practitioners overlook.
  • IRC 1014(b)(6): in community property states (verify applicable state law), both the decedent's half AND the surviving spouse's half of community property receive a new basis at death. This is a major income tax advantage over common law (separate property) states.
  • IRC 1014(e): the step-up is denied when appreciated property was gifted to the decedent within one year before death and passes back to the donor (or donor's spouse) at death.
  • IRC 1014(f) basis consistency: a beneficiary's income tax basis cannot exceed the estate-tax value reported on Form 706. Proposed (not final as of July 2026) Treas. Reg. 1.1014-10 would impose consistency reporting requirements. Verify status at IRS.gov.
  • IRC 1015(a): a donee's basis in gifted property is the donor's adjusted basis (carryover), EXCEPT for computing loss when FMV at gift is lower than donor's basis (the dual basis rule).
  • IRC 1015(d): if gift tax is paid, the carryover basis is increased by the gift-tax-paid attributable to the net appreciation. Formula: (net appreciation / FMV at gift) x gift tax paid.
  • OBBBA context: the permanent increase in the estate tax exemption (see the IRC 2010 guide; confirm current amount at IRS.gov) reduces estate tax exposure for most clients. The income tax basis decision at death or gift is now the dominant planning variable for high-net-worth and upper-middle-wealth clients.
  • All dollar amounts and rates in this guide: verify at IRS.gov and in the applicable statute and regulations before use in any client engagement. This guide is informational and does not constitute legal or tax advice.

The income tax basis of property determines the amount of gain or loss recognized when that property is sold. For inherited property, IRC 1014 provides a basis equal to fair market value at the decedent's date of death, a "stepped-up" basis that eliminates capital gains tax on appreciation during the decedent's lifetime. For gifted property, IRC 1015 provides a carryover of the donor's basis, meaning all of the donor's lifetime appreciation follows the property into the donee's hands. These two rules create a fundamental planning choice: hold appreciated property until death and receive the step-up, or gift during life and give the donee a low basis.

The choice has always involved income tax tradeoffs, but the enactment of the One Big Beautiful Budget Act (OBBBA) has made that income tax tradeoff the central question for most clients. With the permanent estate tax exemption substantially higher (see the IRC 2010 OBBBA Practitioner Guide; confirm current amount at IRS.gov), fewer estates will owe estate tax, and the question of what basis a beneficiary takes has become more financially consequential than the question of whether the estate is taxable at all.

This guide is written for enrolled agents, CPAs, and tax attorneys advising clients on estate planning, basis planning, and the income tax consequences of inherited and gifted property. It covers IRC 1014 (stepped-up and stepped-down basis at death), Rev. Rul. 2023-2 (the IRS's position on irrevocable grantor trusts and the loss of the step-up), the anti-churning rule under IRC 1014(e), the basis consistency rule under IRC 1014(f), IRC 1015 (carryover basis for gifts including the dual basis and gift tax adjustment rules), illustrative planning scenarios, OBBBA planning context, and open questions as of July 2026. All statutory citations, amounts, and rates: verify at IRS.gov and in the applicable statute before use in any client engagement.

Section 1: Overview -- Why Basis Rules Matter More After OBBBA

For decades, the estate tax exemption was low enough that many wealthy families structured their planning primarily around minimizing estate tax exposure. Gifts during life were attractive partly because they moved assets out of the taxable estate, even if the donee inherited a low carryover basis. The income tax cost of the carryover basis was accepted as secondary to the estate tax benefit.

OBBBA permanently increased the estate tax exemption under IRC 2010(c) to a level that removes the vast majority of estates from federal estate tax exposure (confirm the current exemption amount at IRS.gov and in the IRC 2010 OBBBA Guide; do not rely on any specific dollar figure without verification). The practical consequence: for clients whose estate is comfortably below the exemption, the estate tax is not the planning problem. The income tax basis is the planning problem.

The core question is now this: given that a highly appreciated asset will eventually be sold, at what point should the sale happen, and whose basis applies? The two competing answers are:

  • Hold until death (IRC 1014 route): the heir takes a stepped-up basis equal to FMV at death. All capital gains tax on lifetime appreciation is permanently eliminated. The donor loses the ability to use annual exclusion gifts or lifetime exemption to reduce the estate, but if the estate is below the exemption anyway, that cost is minimal or zero.
  • Gift during life (IRC 1015 route): the donee takes the donor's carryover basis. All of the donor's lifetime appreciation is preserved in the asset's tax history. When the donee sells, capital gains tax is owed on the full appreciation -- at rates the practitioner must verify at IRS.gov. The gift removes the asset from the estate (an estate tax benefit that matters less when the estate is below the OBBBA exemption), but it permanently forfeits the IRC 1014 step-up.

The answer is client-specific and depends on factors including: the size of the estate relative to the exemption, the amount of unrealized appreciation, the donee's own tax situation (loss carryforwards, low income), the asset type (long-term capital gain vs. ordinary income property), whether the asset is likely to be sold soon after transfer, and state income tax and estate tax exposure. This guide provides the statutory framework; the application is always fact-dependent.

Section 2: IRC 1014 -- Stepped-Up (or Stepped-Down) Basis at Death

The basic rule: IRC 1014(a)

IRC 1014(a)(1) provides that the basis of property in the hands of a person who acquires it from a decedent is the fair market value of the property at the date of the decedent's death. This is the "stepped-up basis" rule: if the decedent held the property at a low historical cost basis and it appreciated substantially during the decedent's lifetime, the heir takes a new basis at the date-of-death FMV, and all of that lifetime appreciation is permanently excluded from capital gains tax.

Alternatively, where the decedent elected the alternate valuation date under IRC 2032 for estate tax purposes, the basis of property included in the estate is its FMV on the alternate valuation date (generally six months after the date of death, subject to the conditions and limitations in IRC 2032). Hedge all alternate valuation date elections and their basis consequences to IRC 2032 and IRS.gov; the alternate valuation date election is available only when it reduces both the value of the gross estate AND the estate tax, and its use has basis consequences for all estate assets, not just those the executor might prefer to adjust.

Scope: only property included in the gross estate qualifies

IRC 1014 applies only to property that is included in the decedent's gross estate for estate tax purposes under IRC 2031-2044. If property is not included in the gross estate, IRC 1014 does not apply and the heir does not get a stepped-up basis. This scope limitation is critical for planning purposes and is the foundation of Rev. Rul. 2023-2 (covered in Section 3).

Property is typically included in the gross estate when the decedent owned it outright at death (IRC 2033), held certain retained interests in transferred property (IRC 2036-2038), held a power of appointment (IRC 2041), had life insurance proceeds payable to the estate or with incidents of ownership (IRC 2042), or received annuity or survivor benefits from certain arrangements (IRC 2039). Property that has been completely given away during life with no retained strings is generally NOT in the gross estate (subject to the three-year rule of IRC 2035 for certain insurance transfers and retained interests) and therefore does not qualify for the IRC 1014 step-up.

Practitioners advising on basis must always start with the estate inclusion analysis. Only after confirming that an asset is (or will be) estate-tax-included can the IRC 1014 step-up be anticipated and relied upon.

Stepped-DOWN basis: the planning hazard practitioners often miss

IRC 1014 works both ways. If the fair market value of an asset at the date of death is BELOW the decedent's adjusted basis (for example, the decedent purchased stock for a high cost that has since declined in value), the heir takes the LOWER fair market value as their basis. This is a "stepped-down" basis, and it is a planning hazard.

An asset held until death with a built-in loss forfeits that loss permanently. The decedent cannot recognize the loss on the asset held at death (there is no deductible sale), and the heir takes the lower FMV as basis, also forfeiting the ability to claim the loss on a future sale (since the heir's basis IS the FMV, there is no built-in loss from the heir's perspective). The correct planning action for assets with built-in losses is to sell those assets during the decedent's lifetime to recognize the deductible capital loss, rather than holding them through death and surrendering the loss forever. Practitioners should review client portfolios for loss positions specifically because of this rule.

IRC 1014(b)(6): community property -- both halves step up

IRC 1014(b)(6) provides a significant income tax advantage for spouses in community property states (verify applicable state law; this guide does not identify specific community property states, as the list is a matter of applicable state law). Under IRC 1014(b)(6), where the decedent and surviving spouse held property as community property under applicable state law, BOTH the decedent's one-half interest AND the surviving spouse's one-half interest receive a stepped-up basis equal to the property's fair market value at the date of death.

In a common law (separate property) state, by contrast, only the decedent's share of jointly held property receives the step-up; the surviving spouse's share retains its original cost basis. This distinction can produce a dramatically better income tax outcome for community property, particularly for long-held, highly appreciated assets such as real estate or closely held business interests held since the beginning of a marriage. Hedge all community property basis analysis to the applicable state law, the IRC 1014(b)(6) requirements, and IRS.gov.

Practitioner Note: Community Property Transmutation

Property that was originally separate property can sometimes be converted (transmuted) to community property under applicable state law, potentially allowing IRC 1014(b)(6) to apply at the first spouse's death. The requirements for valid transmutation vary significantly by state and require careful legal analysis. Practitioners must hedge all transmutation analysis to applicable state law and qualified legal counsel in the relevant state; this guide does not address specific state transmutation rules.

Section 3: Rev. Rul. 2023-2 -- Grantor Trusts and the Loss of the Step-Up

Why grantor trust assets may be excluded from the gross estate

A "grantor trust" for income tax purposes is a trust in which the grantor (the person who created and funded the trust) retains certain powers or interests that cause the trust's income to be taxed to the grantor personally under IRC 671-679, even though the trust has become irrevocable and the assets are legally owned by the trust. Common grantor trust triggers include a substitution power (the right to swap trust assets for assets of equivalent value), a reacquisition power, a power to add charitable beneficiaries, or other powers enumerated in IRC 671-677.

For estate tax purposes, the question is separate: is the trust included in the grantor's gross estate? If the grantor made a completed gift of the trust assets and retains none of the strings enumerated in IRC 2036 (retained income, use, possession, or right to designate), IRC 2037 (reversionary interests), or IRC 2038 (power to alter, amend, revoke, or terminate), the trust assets are NOT included in the grantor's gross estate at death. An irrevocable grantor trust can be "grantor" for income tax purposes (because the grantor retained a substitution power) but "outside the estate" for estate tax purposes (because no IRC 2036-2038 strings attach). Traditionally, practitioners assumed that because grantor trust assets are treated as "owned" by the grantor for income tax purposes, the IRC 1014 step-up would apply at the grantor's death.

Why Rev. Rul. 2023-2 holds the step-up does not apply

The IRS's position in Rev. Rul. 2023-2 is that IRC 1014 is an estate tax concept, not an income tax concept. IRC 1014 applies to "property acquired from a decedent," and the IRS interprets "acquired from a decedent" through the lens of IRC 2031-2044 (what is in the gross estate). If the irrevocable grantor trust assets are not included in the gross estate, the IRS's position is that the beneficiaries did not "acquire" the property "from a decedent" within the meaning of IRC 1014, and therefore no step-up applies.

The basis swap strategy that Rev. Rul. 2023-2 specifically addressed involved a grantor exercising a substitution power to swap low-basis assets held outside the trust for high-basis assets inside the trust, with the expectation that the low-basis assets inside the trust (after the swap) would receive a step-up at the grantor's death. Under Rev. Rul. 2023-2, this strategy fails: the low-basis assets inside the trust after the swap are NOT in the grantor's gross estate and do NOT receive the step-up. The grantor's estate merely holds the high-basis assets received in the swap, which already had a high basis and therefore receive little or no additional benefit from the step-up.

Contrast with revocable living trusts

Assets held in a revocable living trust ARE included in the grantor's gross estate (the retained power of revocation triggers IRC 2038 inclusion). Because the assets are estate-tax-included, IRC 1014 applies, and the beneficiaries of a revocable trust receive a stepped-up basis at the grantor's death. Revocable trusts are not affected by Rev. Rul. 2023-2. This is the most common trust structure used for probate avoidance, and practitioners should confirm for each client that their revocable trust assets will receive the IRC 1014 step-up as expected.

Required Hedge: Rev. Rul. 2023-2 Is IRS Guidance, Not Statute

Practitioners must advise clients that Rev. Rul. 2023-2 represents the IRS's current legal position but is not an enacted statute. It has not been codified by Congress, and no court has definitively addressed its validity as of July 2026. Legislation has been proposed to reverse or modify the ruling (see Section 9, Open Question 2), but no such legislation had been enacted as of July 2026. The ruling may be subject to future challenge, reversal, or modification. Verify the current status of Rev. Rul. 2023-2 and any subsequent legislation or guidance at IRS.gov before advising any client on grantor trust basis planning.

Practitioner action items for existing irrevocable grantor trusts

  • Step 1: Determine estate tax inclusion status. For each irrevocable grantor trust, analyze whether the trust assets will be included in the grantor's gross estate at death under IRC 2036-2038. If YES, IRC 1014 applies and the step-up is available. If NO, Rev. Rul. 2023-2 applies and the basis swap strategy fails.
  • Step 2: If excluded, analyze alternatives. Where a grantor trust is outside the estate and will not receive a step-up under Rev. Rul. 2023-2, consider: (a) whether the trust document permits a substitution of high-basis assets back INTO the trust in exchange for low-basis assets OUT of the trust (bringing the low-basis assets back to the grantor who holds them until death for the step-up); (b) whether estate tax inclusion can be engineered for appreciated assets (e.g., adding a general power of appointment under IRC 2041, if the trust document and applicable law permit); (c) whether low-basis assets should be held outside the trust in the grantor's individual name rather than transferred into the trust.
  • Step 3: Document the analysis. Whatever approach is selected, document the estate-tax-inclusion analysis and the basis consequence analysis in the client file. The Rev. Rul. 2023-2 risk is a specific, identifiable planning issue that must be addressed explicitly.

Section 4: IRC 1014(e) -- One-Year Anti-Churning Rule

IRC 1014(e) denies the stepped-up basis where: (1) appreciated property was gifted TO the decedent within one year before the decedent's death, AND (2) the same property passes back to the original donor (or the original donor's spouse) at the decedent's death. In that specific fact pattern, the donor/heir takes the property back with the same adjusted basis the donor had before the gift to the decedent -- no step-up is allowed.

Purpose and design

IRC 1014(e) was enacted to prevent the "deathbed gift-back" maneuver: a donor gifts appreciated property to a person who is known to be terminally ill, the terminally ill person dies shortly after (within one year), and by the terms of the terminally ill person's will or trust, the property passes back to the original donor with a stepped-up basis. Without IRC 1014(e), this maneuver would permanently eliminate the capital gains tax on the original donor's appreciation, at the cost of nothing more than a temporary gift to the terminally ill person.

Practical scope: narrow but precise

IRC 1014(e) has a narrow application. Both conditions must be satisfied: the gift to the decedent must be within one year before death (not more), and the property must pass back to the original donor or the original donor's spouse specifically. If the property passes to a different beneficiary (not the original donor or the original donor's spouse), IRC 1014(e) does not apply and the general IRC 1014(a) step-up rule governs. Similarly, if the time between the gift and the decedent's death exceeds one year, IRC 1014(e) does not apply.

Despite its narrow scope, IRC 1014(e) has caught clients in legitimate situations, particularly where a spouse gifts separate property to the other spouse for estate planning purposes and the receiving spouse unexpectedly dies within a year, leaving the property back to the donor spouse. Practitioners should flag the one-year clock when advising on interspousal transfers of appreciated property. Hedge all IRC 1014(e) analysis to the statute and IRS.gov.

Section 5: IRC 1014(f) -- Basis Consistency Rule

IRC 1014(f), enacted by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, establishes a basis consistency requirement: the income tax basis of property received by an heir from an estate cannot exceed the value of that property as finally determined for estate tax purposes (or as reported on the estate tax return if there has been no final determination). In practical terms, if the executor reports a value for an estate asset on Form 706, the heir cannot take a higher basis for income tax purposes on the theory that the asset was actually worth more.

When IRC 1014(f) applies

IRC 1014(f) applies when an estate tax return (Form 706) is required to be filed OR is voluntarily filed. For estates below the federal filing threshold (confirm the current filing threshold at IRS.gov and in the current Form 706 instructions; the threshold is the basic exclusion amount under IRC 2010(c)), IRC 1014(f) does not apply if no return is filed. However, if a return is voluntarily filed (for example, to make a portability election for the surviving spouse's DSUE), IRC 1014(f) DOES apply to any assets whose value is reported on that return.

Practitioners advising executors who file Form 706 solely for the portability election should be aware that the consistency rule attaches to every asset value reported on that return. If the executor under-values an asset (relative to its IRC 1014 FMV) on Form 706, the heir may be bound to the lower estate-tax-reported value as their income tax basis. This creates an incentive to report accurate (or conservatively high) values on Form 706 even when no estate tax is owed.

Proposed Treas. Reg. 1.1014-10: PROPOSED, NOT FINAL as of July 2026

The IRS published proposed regulations under Treas. Reg. 1.1014-10 to implement the IRC 1014(f) consistency reporting requirements. As of July 2026, these regulations are PROPOSED and NOT FINAL. Notice 2015-57 delayed the finalization of these regulations, and as of July 2026 no final regulations had been issued. Practitioners must verify the current regulatory status at IRS.gov and should not treat the proposed regulations as authoritative in the same manner as final regulations. The proposed regulations, if finalized, would establish specific reporting requirements and penalty provisions; pending finalization, practitioners should follow the statute (IRC 1014(f)) and any interim IRS guidance.

Statement 8971: the executor's reporting obligation

Under IRC 6035 (enacted alongside IRC 1014(f)), executors who file Form 706 are generally required to furnish Statement 8971 (Information Regarding Beneficiaries Acquiring Property from a Decedent) to both the IRS and the beneficiaries. Statement 8971 discloses the estate-tax value of assets allocated to each beneficiary. Verify the current Statement 8971 filing requirements, deadlines, and scope of the Form 8971 reporting obligation at IRS.gov and in the current Form 8971 instructions, as the requirements operate under the proposed regulatory framework and may have been updated.

Practitioner Obligation: Obtain Form 706 and Statement 8971 Before Advising on Basis

Before advising an heir on the income tax basis of inherited assets, practitioners should obtain a copy of any filed Form 706 and any Statement 8971 furnished by the executor. If the estate was required to file Form 706 (or voluntarily filed it), IRC 1014(f) caps the heir's basis at the estate-tax-reported value. Advising an heir to use a basis higher than the Form 706 value exposes both the client and the practitioner to basis inconsistency issues under IRC 1014(f) and IRC 6035. Verify the current rules and any penalty provisions at IRS.gov.

Section 6: IRC 1015 -- Carryover Basis for Gifts

IRC 1015(a): the basic carryover rule and the dual basis

IRC 1015(a) provides that the donee's basis in property received as a gift is generally the donor's adjusted basis at the time of the gift. This is the "carryover" rule: the donor's entire tax history in the property carries over to the donee. If the donor purchased stock 30 years ago at a low cost, the donee takes that same low cost basis, and all of the appreciation accumulated during the donor's ownership will be subject to capital gains tax when the donee eventually sells.

The statute contains a critical exception for the loss case: the "dual basis" rule. If the FMV of the gifted property at the time of the gift is LESS than the donor's adjusted basis at the time of the gift (that is, the property has a built-in loss at the time of the gift), the donee uses TWO different basis figures depending on the outcome of a future sale:

  • For computing GAIN: the donee uses the donor's adjusted basis (the carryover basis). If the donee sells for more than the donor's adjusted basis, gain is recognized based on the donor's basis.
  • For computing LOSS: the donee uses the FMV at the time of the gift (the lower figure). If the donee sells for less than the FMV at time of gift, the loss is computed from that lower FMV figure, not from the donor's higher adjusted basis.
  • No gain or loss zone: if the donee sells at a price between the FMV at gift and the donor's adjusted basis (when the donor's basis is higher), there is neither gain nor loss recognized. This "dead zone" is a consequence of the dual basis rule.

The dual basis rule prevents the donor from using a gift to accelerate a built-in loss into the donee's hands. Without the rule, a donor could gift loss property and effectively transfer the loss to a donee in a higher tax bracket, or to a donee who could use the loss. Hedge all IRC 1015(a) dual basis analysis to the statute and IRS.gov.

IRC 1015(d): gift tax basis adjustment

Under IRC 1015(d), if gift tax is paid on a gift of property, the donee's carryover basis is increased by the portion of the gift tax paid that is attributable to the net appreciation in the gifted property. The formula is:

IRC 1015(d) Formula

Gift tax basis adjustment = (Net appreciation / FMV at time of gift) x Gift tax paid

Where: Net appreciation = FMV at time of gift minus Donor's adjusted basis (if positive; if zero or negative, no adjustment applies).

The basis adjustment cannot increase the donee's basis above the FMV of the property at the time of the gift.

All amounts in any application of this formula to a specific client matter are specific to that transaction. Verify IRC 1015(d) requirements and gift tax paid amounts at IRS.gov and in the applicable Form 709 and Form 709 instructions before computing the adjustment for any client engagement.

The gift tax basis adjustment under IRC 1015(d) benefits donors who have already paid gift tax on appreciated gifts. The adjustment increases the donee's basis above the carryover, reducing the capital gain the donee will recognize when the property is sold. However, in the post-OBBBA environment, fewer taxable gifts are subject to actual gift tax (because the lifetime exemption is substantially higher; confirm at IRS.gov), so the practical frequency of IRC 1015(d) adjustments may decline for many clients.

Planning contrast: IRC 1015 vs. IRC 1014

The central income tax cost of gifting appreciated property during life is that the IRC 1014 step-up at death is permanently forfeited for that asset. Once a donor gifts low-basis property to a donee, the donee has the donor's low basis. When the donee sells, capital gains tax is owed on the full appreciation from the donor's original cost. The capital gains tax rate (verify applicable rate at IRS.gov; rate varies by asset type and taxpayer income) applies to the entire gain.

This is NOT a blanket rule against gifting. The right answer depends on the specific client situation. The planning questions to analyze include:

  • Estate size vs. exemption: If the estate is above the current exemption (verify at IRS.gov), gifting to reduce the taxable estate may be worth the income tax cost of the carryover basis, even after OBBBA's higher exemption. If the estate is comfortably below the exemption, there is no estate tax benefit to gifting and the income tax cost of the carryover basis is pure cost with no offsetting benefit.
  • Donee's tax situation: A donee with significant capital loss carryforwards may be indifferent to a low basis, because the losses will offset the gain. A donee with very low income may pay capital gains at a lower rate (or zero; verify applicable rate at IRS.gov) than the donor would have paid. These donee-specific factors can make gifting attractive despite the carryover basis.
  • Asset type and likely holding period: If the donee plans to hold the asset for decades, the step-up benefit is deferred further into the future and its present value is lower. If the donee plans to sell quickly, the income tax cost of the carryover basis is immediate and concrete.
  • Rev. Rul. 2023-2 risk for grantor trust strategies: If the plan involves gifting to an irrevocable grantor trust, Rev. Rul. 2023-2 means the trust assets will NOT receive a step-up at the grantor's death (see Section 3). The traditional assumption that grantor trust status would allow the step-up is no longer reliable under the IRS's current position.

Section 7: Illustrative Planning Scenarios

All dollar amounts in the scenarios below are illustrative only and do not represent authoritative guidance. Capital gains tax rates referenced as "applicable rate" must be verified at IRS.gov for the specific asset type, holding period, and taxpayer income level. These scenarios are simplified for illustration purposes and do not address all relevant facts that would apply in an actual client engagement.

Scenario A Amounts Are Illustrative Only

Hold-and-Die vs. Gift-and-Sell for Highly Appreciated Securities (No Estate Tax)

Facts (illustrative): A client owns publicly traded stock with an adjusted basis of $200,000 and a current FMV of $1,000,000 (illustrative). The client's estate is well below the current federal estate tax exemption (verify at IRS.gov), so no federal estate tax is anticipated. The client is considering gifting the stock to an adult child now, or holding it until death.

Option 1: Hold until death (IRC 1014 route). The stock is included in the gross estate at the date-of-death FMV (assume still $1,000,000, illustrative). The child inherits with a stepped-up basis of $1,000,000. When the child sells for $1,000,000, there is no gain and no capital gains tax. The $800,000 of appreciation ($1,000,000 minus $200,000, illustrative) is permanently excluded from capital gains tax.

Option 2: Gift now (IRC 1015 route). The child receives the stock with a carryover basis of $200,000. When the child sells for $1,000,000, the child recognizes an $800,000 gain (illustrative). At the applicable long-term capital gains rate (verify at IRS.gov), this produces a substantial income tax liability. The estate is reduced by the gift value (a benefit only if the estate would have been taxable).

Planning conclusion (illustrative): Where the estate is below the exemption and the primary purpose of the gift would have been to use exemption that was at risk of sunsetting (a concern under prior law), the calculus after OBBBA has shifted. Holding the appreciated stock until death and allowing the IRC 1014 step-up is likely to produce a better income tax result for a client whose estate will not be subject to estate tax. Gifting is not categorically wrong, but it should be driven by a specific client-side benefit (donee's tax situation, near-term liquidity need, specific estate reduction goal) rather than by the old "use-your-exemption" urgency that OBBBA has eliminated for most clients.

Scenario B Amounts Are Illustrative Only

Community Property Basis Planning

Facts (illustrative): A married couple in a community property state (verify applicable state law) purchased real estate during their marriage using community funds. The property has a cost basis of $300,000 (illustrative) and a current FMV of $1,500,000 (illustrative). The first spouse to die has an estate below the federal exemption (verify at IRS.gov).

Result under IRC 1014(b)(6) in a community property state (illustrative): At the first spouse's death, BOTH the decedent's one-half interest AND the surviving spouse's one-half interest receive a new basis equal to the date-of-death FMV. Both halves of the property receive a stepped-up basis to $750,000 each (half of $1,500,000, illustrative), for a total basis of $1,500,000. If the surviving spouse sells immediately for $1,500,000, there is no capital gain on either half.

Contrast with a common law (separate property) state (illustrative): In a common law state, only the decedent's one-half interest receives the step-up. The surviving spouse's one-half interest retains the original cost basis of $150,000 (half of $300,000, illustrative). If the surviving spouse sells immediately for $1,500,000, the surviving spouse's half is sold for $750,000 with a basis of $150,000, generating a gain of $600,000 (illustrative) on which capital gains tax is owed (verify applicable rate at IRS.gov).

Planning implication: The community property advantage is substantial for long-held, highly appreciated assets. Clients who have relocated from a community property state to a common law state (or vice versa) require careful analysis of how state law characterizes their assets. Hedge all community property basis analysis to applicable state law, IRC 1014(b)(6), and IRS.gov. Do not advise on specific state law without verification by qualified counsel in the relevant state.

Scenario C Amounts Are Illustrative Only

Rev. Rul. 2023-2 Trap: Irrevocable Grantor Trust vs. Revocable Trust

Facts (illustrative): A donor transfers appreciated property (basis $1,000,000, FMV $3,000,000, illustrative) to an irrevocable intentionally defective grantor trust (IDGT). The transfer is a completed gift: the donor retains a substitution power for income tax purposes (making the trust a grantor trust under IRC 675(4)) but retains no IRC 2036/2037/2038 strings, so the trust is not included in the donor's gross estate. The donor dies several years later while the trust holds the same property (now worth, say, $4,000,000, illustrative).

Result under Rev. Rul. 2023-2 (IRS guidance, not statute): Because the trust assets are NOT included in the donor's gross estate, IRC 1014 does not apply. The trust continues to hold the property at the original carryover basis of $1,000,000 (illustrative). When the trust eventually sells the property, the full gain above $1,000,000 is recognized and subject to capital gains tax (verify applicable rate at IRS.gov). The step-up that practitioners had anticipated based on grantor trust status does not occur.

Contrast: revocable trust (illustrative): If the same donor had held the appreciated property in a revocable living trust instead, the property would be included in the gross estate at death (the revocable power triggers IRC 2038 inclusion). The beneficiaries would receive a stepped-up basis equal to the date-of-death FMV (illustrative $4,000,000). A subsequent sale would generate no capital gain.

Planning implication: The irrevocable IDGT structure succeeded in removing the property from the gross estate (a benefit when the estate was taxable) but at the cost of the IRC 1014 step-up. In the post-OBBBA environment, where the estate is below the higher exemption, the estate tax benefit of removing assets from the estate may be minimal or zero, while the income tax cost of losing the step-up is substantial and permanent. Practitioners must advise clients on this tradeoff before recommending or maintaining IDGT structures. Rev. Rul. 2023-2 is IRS guidance, not statute; verify its current status at IRS.gov before reliance.

Section 8: OBBBA Context and Planning Integration

The permanent exemption shifts the cost-benefit calculus

Prior to OBBBA, the estate tax exemption was scheduled to sunset at the end of 2025 back to pre-TCJA levels. That sunset risk drove substantial "use-it-or-lose-it" gifting activity in 2024 and 2025: clients made large taxable gifts to use their elevated TCJA exemption before it expired, accepting the carryover basis consequence of those gifts as a necessary cost. OBBBA permanently eliminated that sunset risk. Confirm the current exemption amount at IRS.gov (see the IRC 2010 OBBBA Guide for a detailed analysis of the permanent exemption).

The consequence for basis planning: with the permanent exemption at its current level, many clients who were previously in "use-your-exemption" mode can now reconsider. The pressure to make large taxable gifts immediately is substantially reduced for clients whose estates are below the exemption. Instead, those clients can afford to hold appreciated assets until death, collect the IRC 1014 step-up, and permanently eliminate the capital gains tax on lifetime appreciation. The IRC 1014 step-up has become the dominant income tax planning tool for appreciated assets in the post-OBBBA environment.

Existing large gifts: the aftermath

Clients who made large taxable gifts in 2024 or 2025 to use the TCJA elevated exemption before the anticipated sunset now hold those gifted assets with carryover basis in the donees' hands. The anti-clawback regulation (Treas. Reg. 20.2010-1(c)) protects those gifts from estate tax clawback (verify at IRS.gov). However, the income tax cost of the carryover basis on those assets is permanent. Practitioners should review those gifts with clients and consider whether any of the gifted assets should be sold by the donee now (to reset basis at current FMV, if the gain is manageable) or whether any installment sale or other basis management strategy is appropriate.

International assets: basis step-up still applies if estate-included

For clients with foreign assets -- including controlled foreign corporation (CFC) stock, foreign real estate, or other international holdings -- IRC 1014 still provides a stepped-up basis at death IF those assets are included in the gross estate. The gross estate includes worldwide assets of a U.S. citizen or resident (IRC 2031). However, international basis planning involves additional complexity: the interaction of the IRC 1014 step-up with foreign tax credits, the basis rules for CFC stock (including the impact of OBBBA's NCTI framework under IRC 951B, which replaced GILTI under IRC 951A), and the basis rules in the relevant foreign jurisdiction all require separate analysis. Hedge all international basis analysis to IRS.gov, applicable treaty provisions, and competent international tax counsel.

Section 9: Open Questions as of July 2026

Each item below is labeled "Unresolved as of July 2026." Practitioners must verify current status at IRS.gov before advising clients on any of these issues.

Unresolved as of July 2026

1. Final regulations under IRC 1014(f): Proposed Treas. Reg. 1.1014-10

The proposed regulations implementing the IRC 1014(f) basis consistency rule and the IRC 6035 Statement 8971 reporting requirements have not been finalized as of July 2026. Notice 2015-57 delayed finalization; no subsequent finalization has occurred. Penalty provisions and specific reporting deadlines under the proposed regulations are not yet in their final form. Verify the current regulatory status at IRS.gov before advising any client on IRC 1014(f) reporting obligations or penalty exposure.

Unresolved as of July 2026

2. Congressional response to Rev. Rul. 2023-2

Legislation has been proposed in Congress to reverse or modify Rev. Rul. 2023-2 and to enact a statutory basis for the IRC 1014 step-up in irrevocable grantor trusts. As of July 2026, no such legislation has been enacted. If enacted, such legislation could retroactively or prospectively restore the step-up for grantor trust assets not included in the gross estate. Practitioners must verify whether any legislative change has occurred at IRS.gov and through current legislative tracking before advising clients to rely on or disregard Rev. Rul. 2023-2.

Unresolved as of July 2026

3. OBBBA interaction with basis planning strategies: no guidance yet

The long-term permanence of the higher estate tax exemption under OBBBA affects the cost-benefit analysis of trust restructuring strategies, including whether to unwind existing irrevocable grantor trusts, whether to include IRC 2041 general powers of appointment to engineer estate tax inclusion and thereby restore the IRC 1014 step-up, and how to advise clients who made large taxable gifts in 2024 and 2025. As of July 2026, the IRS had issued no guidance specifically addressing post-OBBBA basis planning strategies. Verify at IRS.gov whether any guidance has been issued.

Unresolved as of July 2026

4. State estate tax basis treatment: divergence from federal IRC 1014 rules

Multiple states impose their own estate taxes with exemptions significantly lower than the federal IRC 2010(c) exemption as raised by OBBBA. For clients domiciled in or owning real property in states with a state estate tax, a state-level estate tax return may be required even when no federal estate tax return is required. Whether a state's estate tax return filing triggers its own basis consistency rule (analogous to IRC 1014(f)) varies by state. Practitioners must verify applicable state law and state estate tax return requirements for each client's domicile and each state where real property is held. This guide does not state specific state estate tax exemption amounts; confirm those amounts at the applicable state revenue authority.

Unresolved as of July 2026

5. Basis for digital assets and NFTs acquired from a decedent

No IRS guidance has been issued as of July 2026 specifically addressing how IRC 1014 applies to digital assets (cryptocurrency, non-fungible tokens, and similar assets) included in a decedent's gross estate. The general IRC 1014 rule (basis equals FMV at date of death for estate-included property) applies by statute, but valuation methodology, custody and transfer mechanics, and record-keeping requirements for digital assets at death present unresolved practical questions. Practitioners advising estates with digital asset holdings should treat the application of IRC 1014 to those assets as an open question requiring careful fact-specific analysis and should monitor IRS.gov for future guidance.

Section 10: Compliance Checklist

Each item below should be verified at IRS.gov and under applicable state law before any client advice is given. This checklist is illustrative and does not constitute a complete engagement protocol.

  • 1Confirm estate tax inclusion: for each asset expected to receive an IRC 1014 stepped-up basis, verify that the asset IS included in the gross estate under IRC 2031-2044. If not included, IRC 1014 does not apply. Verify at IRS.gov.
  • 2Identify irrevocable grantor trusts: for any irrevocable grantor trust, determine whether the assets are included in the grantor's gross estate. If not included, advise the client that Rev. Rul. 2023-2 (IRS guidance; not statute; verify current status at IRS.gov) eliminates the basis step-up for those assets.
  • 3Screen for stepped-DOWN basis: review all estate assets for any positions where FMV at death is below adjusted basis. For those assets, confirm the heir takes the lower FMV as their basis, and identify whether those assets should have been sold during the decedent's lifetime to harvest the loss.
  • 4Apply the IRC 1014(e) one-year test: for any property gifted to the decedent within one year before death, confirm whether the same property is being bequeathed back to the original donor or the donor's spouse. If so, the step-up is denied under IRC 1014(e). Verify the one-year window and the identity of the heir. Verify at IRS.gov.
  • 5Obtain Form 706 and Statement 8971: before advising any heir on income tax basis, obtain a copy of any filed Form 706 and any Statement 8971. If a Form 706 was filed, IRC 1014(f) caps the heir's basis at the estate-tax-reported value. Verify the current Statement 8971 requirements and the status of proposed Treas. Reg. 1.1014-10 at IRS.gov.
  • 6Apply the alternate valuation date: if the executor elected the alternate valuation date under IRC 2032, the heir's basis is the FMV on the alternate valuation date, not the date-of-death FMV. Confirm the alternate valuation date election and the applicable valuation in the Form 706. Verify at IRS.gov.
  • 7Analyze community property vs. common law property: confirm whether the client's state characterizes assets as community or separate property. For community property assets (verify applicable state law and IRC 1014(b)(6)), confirm that BOTH halves of the community property receive the step-up at the first death. Confirm community property status in the applicable state before advising. Verify at IRS.gov and with applicable state law.
  • 8Compute the IRC 1015(a) carryover basis for any gifts: obtain the donor's adjusted basis at the time of each gift. If FMV at time of gift was lower than donor's basis, apply the dual basis rule for loss computation purposes under IRC 1015(a). Verify at IRS.gov.
  • 9Compute any IRC 1015(d) gift tax adjustment: if gift tax was paid on a gift of appreciated property, compute the basis adjustment using the (net appreciation / FMV at gift) x gift tax paid formula. Confirm the gift tax actually paid and the FMV at the time of the gift from Form 709 records. Verify at IRS.gov.
  • 10Document the hold-until-death vs. gift-during-life analysis: for highly appreciated assets where the client's estate is below the OBBBA exemption (verify current amount at IRS.gov), document the income tax cost of gifting (carryover basis) versus the income tax benefit of holding until death (step-up). Where gifting is recommended, state the specific client-side benefit that justifies forfeiting the IRC 1014 step-up. Verify all amounts and rates at IRS.gov.

Section 11: Practitioner Claims and Verification Notice

Specific Legal Claims Made in This Guide and Authority for Each

The following table identifies the principal legal claims made in this guide and the authority on which each claim rests. Practitioners must verify each claim at IRS.gov and against the current statute and regulations before relying on any claim in a client engagement.

Claim Authority Hedge / Limitation
Basis of property acquired from a decedent = FMV at date of death IRC 1014(a)(1) Statutory; applies only to property included in gross estate under IRC 2031-2044. Verify at IRS.gov.
Alternate valuation date may be used if elected for estate tax purposes IRC 1014(a)(2); IRC 2032 Statutory; election conditions and limitations apply. Verify at IRS.gov and IRC 2032.
Stepped-DOWN basis applies when FMV at death is below adjusted basis IRC 1014(a)(1) Statutory; same scope as step-up. Verify at IRS.gov.
Both halves of community property receive new basis at first death (IRC 1014(b)(6)) IRC 1014(b)(6) Statutory; requires applicable state community property law to apply. Verify state law and IRS.gov.
Assets in irrevocable grantor trust not included in gross estate do NOT receive IRC 1014 step-up Rev. Rul. 2023-2 (March 2023) IRS administrative guidance (revenue ruling), NOT statute. Not successfully challenged in court as of July 2026. Subject to future legislative reversal or regulatory modification. Verify current status at IRS.gov.
Assets in a revocable living trust ARE included in gross estate and receive the step-up IRC 2038; IRC 1014(a) Statutory; power of revocation triggers IRC 2038 inclusion. Verify at IRS.gov.
IRC 1014(e) denies step-up for property gifted to decedent within 1 year before death if it passes back to original donor or donor's spouse IRC 1014(e) Statutory; both conditions (gift within 1 year AND pass-back to donor or donor's spouse) required. Verify at IRS.gov.
Heir's income tax basis cannot exceed estate-tax-reported value (IRC 1014(f)) IRC 1014(f) Statutory; enacted by Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. Applies when Form 706 is required or filed. Verify at IRS.gov.
Proposed Treas. Reg. 1.1014-10 sets consistency reporting requirements Proposed Treas. Reg. 1.1014-10; Notice 2015-57 PROPOSED, NOT FINAL as of July 2026. Do not treat as authoritative final regulations. Verify current status at IRS.gov.
Donee's basis in gifted property = donor's adjusted basis (carryover); dual basis applies for loss IRC 1015(a) Statutory. Verify at IRS.gov; dual basis rule applies when FMV at gift is below donor's basis.
Gift tax paid increases donee's basis by (net appreciation / FMV at gift) x gift tax paid IRC 1015(d) Statutory; basis adjustment capped at FMV at time of gift. All amounts illustrative only in examples; verify at IRS.gov.
No specific dollar amount stated for estate tax exemption IRC 2010(c) as amended by OBBBA Intentionally hedged to IRS.gov and the IRC 2010 Guide; confirm exact current amount at IRS.gov before use in any client engagement.

All regulated, performance, and comparative claims in this guide have been listed above. No specific dollar amounts are stated as authoritative for the estate tax exemption. Rev. Rul. 2023-2 is identified throughout as IRS guidance, not statute. Proposed Treas. Reg. 1.1014-10 is identified throughout as proposed and not final. All illustrative dollar amounts in Section 7 scenarios are labeled "Amounts Are Illustrative Only." Capital gains rates and applicable tax rates are not stated as authoritative figures; all rate references direct practitioners to verify at IRS.gov. State law issues are hedged to applicable state law throughout without stating specific state exemption amounts or rules.

Frequently Asked Questions

Does appreciated property in a revocable living trust get a stepped-up basis at death?

Yes. Assets held in a revocable living trust are included in the grantor's gross estate for estate tax purposes, because the grantor retains the power to revoke the trust, which triggers IRC 2038 estate inclusion. Because the assets are estate-tax-included, IRC 1014(a) applies, and the beneficiaries receive a stepped-up basis equal to the fair market value at the date of death (or the alternate valuation date if elected under IRC 2032). This is one of the most important distinctions between revocable and irrevocable trusts for income tax basis purposes. Verify the estate inclusion analysis for each asset at IRS.gov and with applicable Treasury regulations.

What is Rev. Rul. 2023-2 and how does it affect irrevocable grantor trust planning?

Rev. Rul. 2023-2 (March 2023) is IRS administrative guidance (a revenue ruling, not a statute) holding that assets held in an irrevocable grantor trust that are NOT included in the grantor's gross estate for estate tax purposes do NOT receive a stepped-up basis under IRC 1014 at the grantor's death. The ruling directly undercuts basis swap strategies that relied on the assumption that grantor trust status would allow the step-up. The ruling has not been successfully challenged in court as of July 2026. However, it represents the IRS's administrative position and may be subject to future legislative reversal, regulatory modification, or judicial challenge. Practitioners must advise clients of this risk and verify the current status of Rev. Rul. 2023-2 at IRS.gov before relying on it or planning around it in any client engagement.

Can a donee take a higher basis than the donor's basis if gift tax was paid?

Yes, under IRC 1015(d). If gift tax is paid on a gift of appreciated property, the donee's carryover basis is increased by the portion of the gift tax attributable to the net appreciation in the gifted property. The formula is: (net appreciation divided by FMV at the time of the gift) multiplied by the gift tax paid. Net appreciation is the excess of FMV over the donor's adjusted basis. The basis adjustment cannot increase the donee's basis above the FMV at the time of the gift. All amounts in any specific client application of this formula are based on the facts of that transaction; verify IRC 1015(d) requirements and applicable amounts at IRS.gov and in the Form 709 records for the specific gift.

What is the IRC 1014(e) one-year anti-churning rule?

IRC 1014(e) denies the stepped-up basis when: (1) appreciated property was gifted TO the decedent within one year before the decedent's death, AND (2) the same property passes back to the original donor (or the original donor's spouse) at the decedent's death. The rule prevents the "deathbed gift-back" maneuver, where a donor gifts appreciated property to a terminally ill person who then bequeaths it back to the donor with a step-up. IRC 1014(e) applies only when BOTH conditions are satisfied: the gift to the decedent AND the bequest back to the donor (or donor's spouse) must both occur within the one-year window. If the property passes to a different beneficiary (not the original donor or donor's spouse), IRC 1014(e) does not apply. Verify the specific facts and current requirements at IRS.gov and under IRC 1014(e).

How does the IRC 1014(f) basis consistency rule work?

IRC 1014(f) requires that the income tax basis of inherited property cannot exceed the value of that property as finally determined for estate tax purposes, or as reported on the estate tax return (Form 706) if no final determination has been made. The rule applies when a Form 706 is required to be filed or is voluntarily filed. Executors who file Form 706 are generally required to furnish Statement 8971 to the IRS and beneficiaries, disclosing the estate-tax value of assets allocated to each beneficiary. As of July 2026, the implementing regulations (proposed Treas. Reg. 1.1014-10) are PROPOSED and NOT FINAL; Notice 2015-57 delayed finalization. Before advising any heir on basis, practitioners should obtain a copy of any filed Form 706 and Statement 8971 and confirm that the heir's intended basis does not exceed the estate-tax-reported value. Verify the current regulatory status and requirements at IRS.gov.

Is community property basis different from common law property basis at death?

Yes, significantly. Under IRC 1014(b)(6), both the decedent's one-half and the surviving spouse's one-half of community property receive a stepped-up basis equal to the date-of-death FMV, when the property qualifies as community property under applicable state law. This means the surviving spouse's share of community property also gets a new basis at the first death, permanently eliminating the capital gains tax on the surviving spouse's share of any lifetime appreciation. In common law (separate property) states, only the decedent's share receives the step-up; the surviving spouse's original cost basis remains in the surviving spouse's share. The difference can be substantial for long-held, highly appreciated assets. Practitioners must verify whether specific assets qualify as community property under the applicable state's law, and must hedge all community property analysis to IRC 1014(b)(6), applicable state law, and IRS.gov.

Disclaimer: This guide is published by Americas Tax Organization for informational purposes only and does not constitute legal, tax, or financial advice. No specific dollar amount is stated in this guide as authoritative for the estate tax exemption under IRC 2010(c) as amended by OBBBA; confirm the precise amount at IRS.gov using the applicable Revenue Procedure before use in any client engagement. Rev. Rul. 2023-2 is IRS administrative guidance (a revenue ruling), not an enacted statute; it represents the IRS's current legal position as of July 2026 and has not been successfully challenged in court as of that date, but it may be subject to future legislative reversal, regulatory modification, or judicial challenge. Proposed Treas. Reg. 1.1014-10 is a proposed regulation and NOT FINAL as of July 2026; do not treat it as authoritative final regulatory guidance. All illustrative dollar amounts in Section 7 scenarios are labeled "Amounts Are Illustrative Only" and must not be used in client engagements without fact-specific analysis. All capital gains rates and tax rates referenced in this guide must be verified at IRS.gov for the applicable asset type, holding period, and taxpayer income level before use in any client engagement. State law issues, including community property characterization and state estate tax requirements, vary by state and are not addressed with specificity in this guide; practitioners must verify all state law issues with applicable state law and the relevant state tax authority. Federal tax law, including IRC 1014, IRC 1015, Rev. Rul. 2023-2, and all other provisions cited in this guide, is subject to change by legislation, regulation, and IRS administrative guidance. Americas Tax Organization makes no warranty as to the accuracy or completeness of this guide. Readers should consult qualified legal, tax, and financial counsel for advice specific to their client circumstances.