Florida Step-Up in Basis: How to Avoid Capital Gains on Inherited Property

A parent bought their Florida home in 1988 for $90,000. It is worth $520,000 today. If you sell it as the heir, do you owe capital gains tax on $430,000 of appreciation?

In most cases, no — and understanding why requires knowing one of the most valuable and least understood provisions in the entire federal tax code.

How the Step-Up in Basis Works

Under IRC §1014, when someone dies, the tax basis of capital assets they owned is "stepped up" to the fair market value as of the date of death. The prior cost history is wiped out.

In the example above: your parent's adjusted cost basis was $90,000. When they die, the basis is stepped up to $520,000 — the value on the date of death. If you sell the property immediately for $520,000, your capital gain is zero. If you sell it for $540,000 two years later, you owe capital gains only on the $20,000 of post-death appreciation.

Decades of accumulated gains effectively disappear at death. This is not a loophole or a tax avoidance strategy — it is the explicit design of federal tax law, and it applies to any inherited capital asset: real estate, stocks, business interests, and other investments.

What "Date of Death Value" Actually Means

The stepped-up basis is the fair market value on the exact date of death, not the date of probate, not the date of sale, not when the asset is formally transferred to the heir.

For publicly traded stocks, this is straightforward: the date-of-death value is the average of the high and low trading price on that date, which brokerage statements document automatically.

For real estate, it requires a professional appraisal by a licensed Florida real estate appraiser. The appraisal must be retrospective — determining what the property was worth on the specific date of death, not the current market value when the appraisal is commissioned.

This is where many Florida executors make a costly error: they assume the stepped-up basis is the county's assessed value, or the sale price when the property eventually sells, or the Zillow estimate. None of those work. Without a professional retrospective appraisal, the IRS has grounds to challenge the stepped-up basis figure — and if they succeed, the capital gains calculation reverts to the original cost, which can result in a massive unexpected tax bill years later.

The Documentation Requirement: Do It Now, Not When You Sell

The appraisal must be obtained as close to the date of death as possible. The further in time from the death, the harder it is for the appraiser to credibly establish what the property was worth on that specific date.

The practical deadline is not the date of sale — it is the filing of the estate's Verified Inventory, which must be submitted to the Florida probate court within 60 days of the issuance of Letters of Administration. That inventory must list real property at fair market value, which requires an appraisal.

If you commission the appraisal within that 60-day window — which you should be doing anyway for the inventory — you have the documentation you need for the stepped-up basis. Waiting until the property is sold years later creates a documentation problem that is difficult and expensive to fix.

Joint Tenancy vs. Community Property: The Basis Difference

Florida is not a community property state, so the community property rules that apply in states like California, Texas, and Arizona do not apply here. However, Florida does offer a unique planning tool: the Community Property Trust.

For jointly owned Florida property, the basis treatment at death depends on how ownership was structured:

Tenancy in common or joint tenancy (typical Florida co-ownership): Only the deceased owner's share receives a step-up. If spouses owned a home equally, 50% of the property's basis is stepped up and 50% retains its original cost basis.

Florida Community Property Trust (if properly established): Both spouses' shares receive a full step-up at the death of either spouse — meaning 100% of the property's accumulated gains are wiped out. This is the "double step-up" advantage that makes Alaska-style community property trusts attractive for Florida residents who establish them.

For most Florida couples who did not specifically create a community property trust, the standard result is a 50% step-up on jointly held property.

Does the Step-Up Apply to IRAs and Retirement Accounts?

No. This is a common misconception. The step-up in basis applies only to capital assets — property that holds value and can be sold. IRAs, 401(k)s, and other tax-deferred retirement accounts do not get a stepped-up basis. When a beneficiary inherits an IRA and takes distributions, those distributions are taxed as ordinary income just as they would have been for the original account holder.

The step-up in basis is for non-retirement assets: real estate, stocks held in taxable brokerage accounts, business interests, and tangible personal property.

Selling the Inherited Property: Florida-Specific Considerations

When heirs sell inherited Florida real estate, several Florida-specific issues arise beyond the federal capital gains calculation:

Documentary stamp tax: Florida levies $0.70 per $100 on the consideration paid for real estate transfers (Miami-Dade has a modified rate for commercial property). This is a tax on the buyer, conventionally, but the executor needs to understand it when structuring estate sales.

The Save Our Homes cap: If an heir inherits the property, moves in, and later sells, the Save Our Homes cap (which limits assessed value increases for homestead property) resets to market value when ownership changes. This affects the heir's property tax during their period of ownership, not their capital gains calculation — but it is a cost that affects the overall financial analysis of keeping versus selling.

1031 exchange unavailability for inherited property: Heirs cannot use a 1031 exchange on an inherited property's stepped-up basis because the step-up already eliminates the historical capital gain. A 1031 exchange is used to defer capital gains — when the gain has been erased by the step-up, the exchange serves no purpose for historical appreciation.

Documenting the stepped-up basis correctly is one of the most financially consequential tasks in Florida estate administration. The Florida Final Tax & Estate Tax Guide includes a Basis Step-Up Valuation Log template and a complete checklist for appraisal documentation so you can hand your CPA exactly what they need and avoid the IRS challenge entirely.

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