Stepped-Up Basis at Death: IRC 1014 and the California Double Step-Up

A Bay Area engineer retires at 68 in San Jose holding $5 million of Google stock that cost him $300,000 over twenty years of ESPP and RSU vesting. If he sells the shares the day before he dies, he writes a federal capital gains check on $4.7 million of gain (roughly $1.12 million at 23.8%, comprising 20% LTCG plus 3.8% NIIT) plus California tax of about $625,000 at the top 13.3% bracket. Total tax: roughly $1.74 million.

If he holds the same shares until death and his heirs sell them the day after the funeral, the federal and California tax on that same $4.7 million of accrued gain is zero. The entire built-in gain disappears.

That single rule, IRC Section 1014, is the most powerful estate planning lever in the Code. It rewards holding appreciated assets through death and punishes lifetime gifts of the same property. For Bay Area families sitting on decades of unrealized tech gains, real estate appreciation, or concentrated startup stock, understanding §1014 is the difference between an orderly transfer and a seven-figure mistake.

This guide walks through what §1014 does, how California community property creates a double step-up at first death, the carryover-basis trap on lifetime gifts, which assets do not step up, the optional alternate valuation date, and what proposed tax bills could change. For the legal documents themselves (wills, trusts, powers of attorney) you need an estate planning attorney. Our role at Silicon Valley Tax is the tax side: step-up valuation, carryforward basis tracking, fiduciary trust returns, and the post-death income tax filings that follow.

What IRC Section 1014 Actually Does

Under IRC §1014(a), the basis of property acquired from a decedent is the fair market value of that property on the date of the decedent's death, or, if the executor elects, the value six months later (the alternate valuation date under Form 706). The technical mechanism is dry; the consequence is huge.

Compare to the general basis rule under IRC §1011, which says your basis is what you paid (cost basis). If you bought stock for $10 and sold it for $100, your gain is $90. Section 1014 carves out a special rule for property passing at death: basis resets to FMV at death, and the entire accrued gain that built up during the decedent's lifetime is permanently erased for income tax purposes.

The technical name is "stepped-up basis," but it actually steps to FMV in either direction. If an asset declined in value before death (the rare downhill case), basis steps down to FMV and the unrecognized loss is permanently lost. Most planning revolves around the upside step-up, which is where the leverage sits.

The Bay Area Magnitude

Step-up matters most when an asset has appreciated dramatically over a long hold. Bay Area portfolios are built this way. Consider three common situations:

• Concentrated tech stock. A 30-year Google, Apple, Meta, or NVIDIA employee with ESPP plus decades of RSU vesting commonly holds $3 to $10 million of single-stock with cost basis of 5 to 10% of FMV. Step-up at death erases 90%+ of the accrued gain.
• Long-held primary residence. A $400,000 Sunnyvale ranch home from 1995 is a $2.8 million house in 2026. The $250,000 single ($500,000 married) §121 exclusion covers part. Step-up at death on the remainder eliminates the rest.
• Pre-IPO founder stock. Founders holding QSBS that exceeded the per-issuer cap (greater of $10M or 10x basis under §1202 for pre-July 5, 2025 stock; $15M under the One Big Beautiful Bill Act, Public Law 119-21, for QSBS issued after that date) discussed in our QSBS guide often retain the un-excluded gain. Death erases what QSBS didn't.

Example. Married Cupertino couple, both 72. Joint brokerage account holds $8 million of appreciated Apple stock, cost basis $400,000. If they sold today, gain would be $7.6 million. At combined 37.1% (20% federal + 3.8% NIIT + 13.3% CA), tax bill: about $2.82 million. If instead the first spouse dies holding the stock and California community property double step-up applies, basis resets to $8 million for the surviving spouse. Sold the next day: zero gain, zero tax.

What Goes Wrong Without a CPA in the Loop

The most common mistake we see at intake: a Bay Area family titled their brokerage account JTWROS twenty years ago because the bank suggested it, never converted to Community Property With Right of Survivorship. At first death, only the decedent's half of an $8M appreciated position steps up. The surviving spouse sells and pays roughly $700,000 in federal-plus-California tax that would have been zero under proper community-property titling. A ten-minute brokerage retitling, done while both spouses are alive, was the entire fix. Filing software does not flag the titling question; it just processes the sale.

The Lifetime Gift Trap: Carryover Basis Under IRC 1015

If §1014 says property received at death takes FMV basis, IRC §1015 says property received as a lifetime gift takes carryover basis. The donee inherits the donor's basis, holding period, and built-in gain. The accrued gain travels with the property.

This produces the most common estate planning mistake we see at SVT: parents who gift appreciated stock or real estate to adult children during life "to get it out of the estate." The motivation is usually estate-tax avoidance, but the move forfeits the step-up.

Consider the same Cupertino couple. If they gift $8 million of Apple stock to their daughter in 2026, she takes their $400,000 basis. When she sells later for $8 million, she owes capital gains tax on $7.6 million. They saved nothing on estate tax (well below the 2026 unified exemption anyway) and converted a future $0 tax bill into a $2.82 million one.

The general rule for high-basis-versus-low-basis planning:

• Hold appreciated property until death. Heirs get FMV basis under §1014. The gain disappears.
• Gift cash or high-basis assets. Cash has FMV = basis, so no carryover problem. High-basis stock (recently purchased, or QSBS already at $15M exclusion ceiling) is also fine to gift.
• Use the lifetime exemption strategically. When you do need to move value out of the estate (because you are above the exemption or expect to be), do it through structures that preserve step-up where possible, such as a SLAT, or through assets that don't carry built-in gain. See our gift tax exclusion guide for the annual exclusion math.

California Community Property: The Double Step-Up

This is the rule that turns ordinary federal step-up into a Bay Area planning superpower. IRC §1014(b)(6) says that when one spouse dies holding community property, the entire community property asset receives a stepped-up basis, not just the deceased spouse's half. The surviving spouse's half also steps up, even though that spouse is still alive.

California is one of nine community property states. Under California Probate Code §6401, on the death of a married person, the decedent's half of community property passes per the will or trust, and the survivor retains their existing half. For federal income tax under §1014(b)(6), both halves get the basis reset.

Contrast with non-community-property states (most of the East Coast). There, joint tenancy or tenancy-in-common gives a step-up on only the deceased spouse's half. The survivor keeps their original basis on their half. On a $4 million joint asset with $400,000 combined basis, a non-CA couple gets basis stepped to $2.2 million ($2M decedent half FMV + $200K survivor half cost). A California community-property couple gets stepped to the full $4 million.

The catch: only assets titled as community property qualify. Default title matters.

Separate vs Community Property Titling in California

In California, the default rule under Family Code §760 is that property acquired during marriage from earnings is community property. But people frequently mistitle assets, hold pre-marriage assets, or accept inheritances that remain separate property. Common patterns we see:

• Pre-marriage stock or real estate stays separate property unless explicitly converted (transmuted) to community.
• Inheritances and gifts to one spouse are statutorily separate property even if received during marriage.
• Joint tenancy with right of survivorship (JTWROS) titles, common on brokerage accounts and real estate, are not community property by default. Only the decedent's half steps up.
• Community property with right of survivorship (CPWROS) is a separate California title form that combines community treatment with avoidance of probate. Both halves step up at first death.
• Living trusts titled as community property (sometimes called joint revocable living trusts with community-property provisions) are the gold-standard structure for California couples who want both spouses' contributions treated as community.

Retitling assets from JTWROS to community property with right of survivorship is often a five-minute change at the bank or brokerage, and it can save the surviving spouse hundreds of thousands of dollars in future capital gains. This is a coordination question between your estate planning attorney (who drafts the trust and any property agreements) and your CPA (who tracks basis and files the post-death returns).

The Six-Month Alternate Valuation Date

For estates large enough to require a federal estate tax return on Form 706 (above the 2026 unified credit exemption of $15 million per individual), the executor can elect to value all assets at the alternate valuation date six months after death rather than the date of death. This is an all-or-nothing election covering every asset in the estate.

The election is usually made when asset values have dropped between death and six months later, because lower asset values mean lower estate tax. But it cuts both ways: the basis to the heirs is also lower, which means more capital gains tax later when the heirs sell.

For a growing-asset estate, the alternate valuation date rarely makes sense. For an estate that took a market hit in the months following death (think a tech-heavy portfolio during a sharp correction), it can be the right call. The executor has to model both sides: estate tax savings now versus capital gains tax later. We run this analysis as part of post-death engagements.

Retirement Accounts Do NOT Step Up: IRD Under IRC 691

The biggest exception to step-up planning is retirement accounts. Traditional IRAs, 401(k)s, and other tax-deferred retirement vehicles are not property in the §1014 sense. The pre-tax dollars sitting in an IRA are what the Code calls "income in respect of a decedent" (IRD) under IRC §691. There is no step-up. The beneficiary inherits the account and pays ordinary income tax on every dollar withdrawn, just as the decedent would have.

The same applies to:

• Traditional 401(k) and 403(b) accounts
• Traditional IRAs (including SEP and SIMPLE IRAs)
• Deferred compensation and unpaid salary at death
• U.S. savings bond accrued interest
• Installment notes receivable
• Annuity contracts (the gain portion)

Roth IRAs are different. The principal already had income tax paid, and the beneficiary receives tax-free distributions (subject to the 10-year payout rule under the SECURE Act; for inherited Roths, annual RMDs within that 10-year period may apply in certain beneficiary scenarios per Notice 2022-53 and Notice 2023-75). Roths are estate-planning friendly; traditional IRAs are not.

The planning implication: spend down traditional IRA balances during life, leave the taxable brokerage to your heirs. A $1 million traditional IRA passed to a child is worth roughly $630,000 after their ordinary income tax. A $1 million taxable brokerage account with a $200,000 basis, passed to the same child, is worth roughly $1 million because step-up wipes out the gain.

This often means doing Roth conversions in early retirement years before required minimum distributions hit, drawing IRA money for living expenses while letting taxable brokerage compound untouched, and using qualified charitable distributions (QCDs) from the IRA after age 70-1/2 instead of writing checks from the brokerage.

What About the Surviving Spouse Step-Up at Second Death?

Step-up runs twice for community-property couples. At the first spouse's death, both halves of community property step up to FMV. The surviving spouse then holds the assets with a fresh basis. When the survivor dies later, the assets step up again at the survivor's death, to whatever FMV is at that point.

So a Bay Area couple who married young, bought Apple stock together in the 1990s, and live to 90 can effectively pass that stock through two complete step-ups across their lifetimes. Decades of accrued gain disappear entirely if the planning is done correctly.

This is why elderly clients often hesitate to sell concentrated positions even when financial diversification would otherwise recommend it. The implicit "tax cost of holding" math has to weigh the future step-up against current diversification value. There is no universal right answer. It is a planning conversation between the client, their wealth advisor, and their CPA.

Threats to IRC 1014 in Future Tax Legislation

Section 1014 has survived every tax bill since 1916, but proposals to limit or repeal it surface in nearly every Democratic budget. The Biden administration's American Families Plan (2021) proposed treating death as a realization event, eliminating step-up entirely on appreciation above $1 million per individual. Senators Sanders, Warren, and Wyden have repeatedly introduced "Sensible Taxation and Equity Promotion" bills that would do similar. Economists Saez and Zucman have made eliminating step-up a core piece of their wealth-tax proposals.

None of these have passed. The One Big Beautiful Bill Act of 2025 (OBBBA) left §1014 intact, and the increased unified credit exemption of $15 million per individual remained in place. As of late 2026, step-up is the law of the land.

But the political pressure does not go away. The federal revenue cost of step-up is estimated at $40+ billion per year, and it is the most-cited "loophole" in academic tax-equity work. A future Democratic administration with a unified Congress could change this, possibly with grandfathering for assets held before the effective date or with carve-outs for primary residences and small business stock.

The defensive planning approach: don't over-rely on step-up for assets you expect to hold for 20+ more years, since the rule could change. Do rely on it for assets you expect to hold to death within a planning window of the next 5 to 10 years, since legislative change on that horizon is unlikely. And keep meticulous basis records for everything, because if §1014 ever does get capped or repealed, basis records become critical overnight.

Where SVT Fits In

SVT handles the tax side of estate and trust work. That includes:

• Step-up basis valuation at death. Documenting FMV on date of death for every asset, often coordinating with valuation specialists for closely held businesses or hard-to-value assets.
• Carryforward basis tracking. Maintaining decedent and beneficiary basis records across years and across multiple trust structures.
• Form 1041 fiduciary income tax returns. For estates and trusts post-death, including final 1040 for the decedent, first 1041 for the estate, and ongoing 1041s for any continuing trusts.
• Form 706 federal estate tax returns for estates above the filing threshold, including the alternate valuation date election analysis.
• Beneficiary K-1 reporting and coordination with beneficiaries' personal returns.
• Roth conversion modeling in the years before death to reduce the IRD problem on traditional retirement accounts.
• Step-up coordination with the estate planning attorney on titling decisions (community property, JTWROS, trust funding) before they become permanent.

For drafting the will, the revocable trust, the spousal lifetime access trust, any irrevocable life insurance trust, or the property agreements that transmute assets between separate and community property, you need an estate planning attorney. We work alongside several local attorneys we trust, and we are happy to refer if you don't already have one.

If you have appreciated assets in California and a multi-decade time horizon, the §1014 conversation is worth having now. Decisions about titling, gifting, Roth conversions, and which accounts to spend down first compound over years. The best version of this plan starts well before anyone is thinking about end-of-life.

Schedule a complimentary consultation to walk through your current asset titling, your basis records, and where step-up can do the most work for your family. If you also want to read more on related estate planning topics, see our posts on whether you actually need a trust and the 2026 gift tax exclusion.