Step-Up in Basis on Inherited Property: How It Works and What It Means for Alaska Heirs

If you inherit property and sell it quickly, you may owe far less in capital gains tax than you expect — or nothing at all. This is because of a provision in federal tax law called the step-up in basis, and it is one of the most valuable tax benefits available to heirs.

Understanding how it works matters whether you inherit a house in Anchorage, a remote cabin on the Kenai Peninsula, a brokerage account, or commercial fishing permits. Alaska heirs have access to the standard step-up that applies nationwide, and in some cases an even more powerful version unique to Alaska.

What "Basis" Means and Why It Matters

The tax basis of an asset is what you paid for it, adjusted for improvements and depreciation over time. When you sell an asset, your capital gain — the amount subject to tax — is calculated as the sale price minus the basis.

If someone bought a house in Anchorage in 1998 for $200,000 and it is worth $900,000 today, their basis is roughly $200,000 (adjusted for any capital improvements). If they sold it today, they would have a $700,000 gain subject to federal capital gains tax.

Now the same house passes to an heir at death. Under IRC Section 1014, the heir's basis is not $200,000 — it is the fair market value of the property on the date the previous owner died. If that value was $900,000, the heir's basis is $900,000. If the heir sells the property for $920,000 a year later, their gain is only $20,000, not $700,000.

This is the step-up in basis. It permanently erases all of the appreciation that occurred during the previous owner's lifetime.

What the Step-Up Covers

The step-up applies to most capital assets inherited at death: real estate, investment accounts, stocks, bonds, commercial real estate, closely held business interests, and tangible personal property like art or collectibles. It applies to appreciated assets and, technically, to depreciated ones too — if a property declined in value, the heir's basis steps down to the lower fair market value.

Assets that do not receive a step-up include:

• IRAs and other retirement accounts. The decedent never paid income tax on these funds. When the heir withdraws them, they owe ordinary income tax on the full amount. There is no basis to step up.
• Income in Respect of a Decedent (IRD). Income the decedent earned the right to receive before death but that was paid out after death (certain royalties, deferred compensation, and the Alaska PFD in some situations) does not receive a step-up. It remains taxable as ordinary income to the estate or beneficiary who receives it.
• Gifts made before death. If the decedent gave away property before dying, the recipient takes the donor's original basis, not a stepped-up basis. This is why holding appreciated assets until death is generally more tax-efficient than gifting them.

How to Calculate the Stepped-Up Basis

The stepped-up basis is the fair market value of the asset on the date of death. "Fair market value" means what a willing buyer would pay a willing seller in an arm's-length transaction, with neither under compulsion to buy or sell.

For publicly traded stocks, this is straightforward — the average of the high and low trading prices on the date of death. For real estate, it typically requires a formal appraisal or at minimum a broker's opinion of value supported by comparable sales data. For CFEC commercial fishing permits, the executor can reference the CFEC Permit Value Reports and Quartile Tables, which track historical and current market values by gear type and region, though formal appraisals are sometimes required for estate administration purposes.

Documenting this value is the executor's responsibility. If the estate inventory (Form P-370, due within three months of appointment) does not establish clear date-of-death values for each asset, the heirs may lose the ability to prove what their stepped-up basis is when they eventually sell — potentially owing tax on gains that legally should be zero.

Selling Inherited Property in Alaska: Practical Tax Implications

If you sell inherited property shortly after receiving it, and the value has not changed much since the date of death, your capital gain will be minimal. If you hold it for years and it appreciates further, you owe capital gains tax only on the appreciation that occurred after the date of death — not on the decades of growth during the previous owner's lifetime.

Long-term capital gains rates apply to inherited property regardless of how long you personally held it. The IRS treats all inherited property as long-term, which means the 0%, 15%, or 20% long-term rates apply instead of short-term (ordinary income) rates. In 2026, the 0% rate applies up to $47,025 of taxable income for a single filer; the 15% rate applies from there up to $518,900.

Alaska has no state capital gains tax, so there is no state-level tax on the gain either. Federal tax is the only obligation on the sale of inherited Alaska property.

The Alaska Community Property Advantage: The Double Step-Up

For surviving spouses, Alaska offers a step-up benefit that goes beyond what every other common-law state provides.

Under standard federal law, only the deceased spouse's share of jointly owned property receives a step-up. If a couple owned a home jointly and one spouse dies, only the deceased spouse's 50% interest steps up to current fair market value. The surviving spouse retains their original 50% at the old basis. When they sell, they owe capital gains tax on appreciation attributable to that half.

Under IRC Section 1014(b)(6), assets held as community property receive a 100% step-up at the first spouse's death — both halves. The surviving spouse's interest steps up alongside the deceased spouse's, eliminating the capital gains tax on the entire asset.

Alaska allows married couples to opt into community property status through a Community Property Agreement or an Alaska Community Property Trust under AS 34.77. Critically, this is available to non-residents of Alaska — couples in common-law states who set up an Alaska Community Property Trust can shelter appreciated assets under the double step-up rules without moving to Alaska.

The benefit can be enormous. On a jointly owned commercial property or investment portfolio worth $10 million where the couple's original combined basis was $2 million, ordinary joint ownership at death would leave the surviving spouse with a $5 million basis on their half and a $5 million stepped-up basis on the deceased's half — a $5 million gain still waiting to be taxed. With community property treatment, both halves step up to $5 million, and the entire $10 million position has a $10 million basis. The capital gains tax on the surviving spouse's future sale drops to zero.

What Executors Need to Do Right Now

If you are administering an Alaska estate, the step-up documentation is time-sensitive:

1. Get date-of-death valuations for all capital assets immediately. Appraisals become harder and more expensive to establish retroactively. For real estate, order a formal appraisal or broker's opinion of value now. For investment accounts, pull the account statements showing the balance on the exact date of death.

2. If a Community Property Trust exists, identify it. If the decedent and surviving spouse executed a Community Property Agreement or funded an Alaska Community Property Trust, the double step-up applies to those assets. The CPA needs the date-of-death value of all community property assets to document the new basis permanently.

3. Record the basis for the heirs. The executor's job is to document and communicate the stepped-up basis to every beneficiary who receives a capital asset. Without this, beneficiaries may pay unnecessary capital gains tax years later when they sell.

The Alaska Final Tax & Estate Tax Guide at /us/alaska/estate-tax/ includes a step-by-step basis documentation process tailored for Alaska assets, including real estate, fishing permits, ANCSA stock, and the community property double step-up.

The Core Takeaway

The step-up in basis is one of the most significant tax benefits in U.S. tax law, and it applies to every heir who inherits a capital asset. For Alaska heirs, it means that decades of appreciation on real estate, investments, and business interests can be permanently erased at the moment of inheritance.

Acting on it requires two things: accurate date-of-death valuations documented in the estate inventory, and for married couples with community property arrangements, proper identification of which assets qualify for the full double step-up. Both require attention in the weeks and months immediately following a death, while records are still accessible and values can still be established cleanly.

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