Which Inherited Assets Don’t Get a Step-Up in Basis? (w/Examples) + FAQs

Quick Answer: For 2025, most inherited property gets a step-up in basis to fair market value at death under IRC §1014. But “income in respect of a decedent” assets — traditional IRAs, 401(k)s, annuities, pensions, and unpaid wages — get no step-up. Gifted assets and certain irrevocable-trust assets also miss out.

This article reflects federal rules and general state rules as of June 2026 and covers tax year 2025. Tax law changes — confirm current figures before you file.

When someone dies, the people who inherit their stocks, home, or land usually catch a major tax break: the asset’s cost basis resets to its date-of-death value, and decades of gain vanish for tax purposes. The trouble is that this break does not cover everything. If you inherited a parent’s traditional IRA, a non-qualified annuity, or savings bonds, you will likely owe ordinary income tax on the built-in gain — and many heirs only learn this after they pull the money out.

The stakes are real and the timing is tight. Inherited retirement accounts often must be emptied within 10 years under the SECURE Act, and Americans hold more than \$44 trillion in retirement assets as of early 2025, much of it destined to pass to heirs who will owe income tax on every dollar. Knowing which assets skip the step-up — before you sell or withdraw — is the difference between a smart plan and a surprise tax bill.

• 💡 You will learn the one rule (IRD) that decides whether an inherited asset is taxed or tax-free.
• 🧾 You will see exactly which accounts — IRAs, 401(k)s, annuities, pensions, bonds — get no step-up.
• 🧮 You will get worked dollar examples so you can copy the math for your own inheritance.
• 🏡 You will learn how gifts and irrevocable trusts quietly lose the step-up, and how to avoid that trap.
• 🛡️ You will get the deadlines, forms, and next steps to protect what you inherited.

What “Step-Up in Basis” Actually Means

Cost basis is what you “paid” for an asset for tax purposes. When you sell, you pay capital gains tax only on the difference between the sale price and your basis. So basis is the number that decides how big your tax bill is.

A step-up in basis resets that number to the asset’s fair market value (FMV) on the owner’s date of death. Under IRC §1014, an heir’s basis in inherited property becomes its date-of-death FMV, and the appreciation that built up during the decedent’s lifetime is wiped clean. If your mother bought stock for \$10,000 and it was worth \$110,000 when she died, your basis is \$110,000 — and that \$100,000 of lifetime gain is never taxed.

The consequence of not getting a step-up is large. Without it, you inherit the decedent’s old, low basis (called carryover basis), and you owe tax on all the gain when you sell or withdraw. That is the entire reason this topic matters: the same \$100,000 of growth is either tax-free or fully taxed, depending only on what kind of asset it is.

A common misconception is that “inherited” automatically means “tax-free.” It does not. The step-up is a feature of capital assets that pass through the estate — not a blanket exemption for everything a person owned at death.

What you should do: before you sell or withdraw anything you inherited, identify which category the asset falls into. That single step tells you whether you face a tax bill and how big it could be.

The Master Rule: Income in Respect of a Decedent (IRD)

The biggest group of assets that get no step-up are “income in respect of a decedent,” or IRD. Under IRC §691, IRD is income the deceased person earned or had a right to receive but had not yet been taxed on before death.

Because that income was never taxed during life, the tax does not disappear at death — it transfers to whoever receives the money. IRD assets keep the decedent’s original basis. There is no step-up, and the recipient pays ordinary income tax (not the lower capital gains rate) when the income is collected.

The consequence is steep. An heir in a high bracket can lose more than a third of an inherited IRA to federal income tax, plus state tax, with no basis relief at all. The tax adviser community treats IRD as one of the most overlooked traps in estate work because it quietly converts an “inheritance” into taxable income.

A common misconception is that IRD gets the favorable long-term capital gains rate. It does not — IRD is taxed as ordinary income, the same as a paycheck.

What you should do: ask the executor or custodian whether each inherited account is “pre-tax” or holds untaxed income. If the answer is yes, treat it as IRD and plan for an income tax bill, not a tax-free windfall.

Which Inherited Assets Get No Step-Up

Here is the core list. Each of these either is IRD or otherwise falls outside IRC §1014.

Traditional IRAs, 401(k)s, and Other Pre-Tax Retirement Accounts

Traditional IRAs, 401(k)s, 403(b)s, and 457 plans are funded with pre-tax dollars, so the money was never taxed going in. As Fidelity confirms, these accounts do not receive a step-up in basis when they pass to a beneficiary.

The consequence is that every dollar the heir withdraws is taxed as ordinary income. Under the SECURE Act 10-year rule, most non-spouse beneficiaries must empty the account within 10 years of death, which can stack large withdrawals into peak earning years.

A common misconception is that you can “roll” an inherited IRA into your own and avoid the tax. Only a surviving spouse can do that — a child or other non-spouse beneficiary cannot. What you should do: spread withdrawals across the 10-year window to avoid jumping into a higher bracket in any single year.

Roth IRAs and Roth 401(k)s

Roth accounts also do not get a step-up, but the result is the opposite — and good. Because Roth contributions were already taxed, qualified distributions to a beneficiary are generally income-tax-free, so the missing step-up does not hurt.

The catch is the same 10-year payout rule for non-spouse heirs, though the account can keep growing tax-free during that window. What you should do: if you inherited a Roth, consider letting it grow and withdrawing near the end of year 10 to maximize tax-free compounding.

Non-Qualified Annuities

Annuities are taxed differently from stocks because they do not receive a step-up in basis. As Annuity.org explains, the earnings portion of every inherited annuity payment is taxed as ordinary income to the beneficiary.

The consequence is that the gain inside the contract — the difference between the premiums paid and the current value — is fully taxable when paid out. The premiums (the owner’s investment) are not taxed again, but the growth is. What you should do: ask the insurer for the contract’s cost basis so you know exactly how much of each payment is taxable.

Pensions, Unpaid Wages, and Deferred Compensation

Final paychecks, unpaid bonuses, accrued vacation pay, commissions, and deferred compensation owed to the decedent are classic IRD. These amounts were earned before death but not yet received, so they are taxed to whoever collects them.

The consequence is that the estate or the heir reports this income and pays tax at ordinary rates. What you should do: the executor should track every payment that arrives after death and report it on the right return, since these are easy to miss.

U.S. Savings Bonds (Accrued Interest)

Series EE and Series I savings bonds accrue interest that is often never taxed during the owner’s life. That accrued interest is IRD and gets no step-up — the heir owes income tax on it when the bond is cashed or matures.

The consequence is a tax bill on years of deferred interest. What you should do: the executor can elect to report the accrued interest on the decedent’s final return to spread or reduce the burden, so weigh that election before cashing the bonds.

Installment Notes Held by the Decedent

If the decedent sold property on an installment plan and was still receiving payments, the untaxed gain in those payments is IRD. The heir who collects the remaining payments reports the gain, with no step-up to erase it.

Assets That Lose the Step-Up for a Different Reason

Not every “no step-up” asset is IRD. Some property misses out because of how it was transferred, not what kind of income it is.

Gifted Assets (Carryover Basis, Not Step-Up)

A gift made during life is not an inheritance. Under IRC §1015, the recipient of a gift takes the giver’s original basis — called carryover basis — not a stepped-up basis.

The consequence is real: if a parent gifts a home worth \$400,000 that they bought for \$80,000, the child’s basis stays \$80,000, and selling triggers tax on \$320,000 of gain. Had the child instead inherited the home at death, the basis would have stepped up to \$400,000. A common misconception is that giving assets away early “helps” heirs — for appreciated property, it often costs them the step-up. What you should do: before gifting appreciated property, compare the gift-tax and capital-gains outcomes with holding the asset until death.

Assets in Irrevocable Grantor Trusts

In Revenue Ruling 2023-2, effective January 1, 2023, the IRS confirmed that assets in an irrevocable grantor trust that are excluded from the grantor’s taxable estate do not get a step-up at death, as Prudential summarizes.

The logic is that the step-up under IRC §1014 applies only to property included in the gross estate. If you moved an asset out of your estate to dodge estate tax, you also moved it out of step-up eligibility. A common misconception is that any trust asset gets a step-up — only assets included in the taxable estate do. What you should do: have an estate attorney review whether trust assets are inside or outside your estate, since the answer flips the basis result.

A Surviving Spouse’s Half in Common-Law States

In the 41 common-law (non-community-property) states, only the deceased spouse’s share of jointly owned property gets a step-up. The surviving spouse’s own half keeps its original basis.

The consequence is a partial step-up — often just 50% — on jointly held assets. This contrasts sharply with community property states, covered below, where the entire asset can step up. What you should do: married couples in common-law states should ask an attorney about titling and credit-shelter planning to capture more basis.

Which Situation Applies to You?

The right answer depends on what you inherited and where. Use this to find your path.

• You inherited a traditional IRA, 401(k), pension, or annuity: read the IRD sections — expect an ordinary income tax bill and a 10-year deadline.
• You inherited a Roth account: read the Roth section — likely tax-free, but mind the 10-year rule.
• You inherited stocks, a home, or land outright: you generally do get a step-up under IRC §1014; your gain is measured from the date-of-death value.
• You received property as a gift while the person was alive: you have carryover basis, not a step-up — see the gift section.
• You inherited trust assets: the answer depends on whether the trust assets were in the taxable estate — see Rev. Rul. 2023-2.
• You are a surviving spouse: your result depends on whether your state is community property or common law.

Worked Examples With Real Dollars

Numbers make this concrete. Here are the calculations you can copy.

Example 1 — Inherited Traditional IRA (No Step-Up)

Suppose Maria inherits her father’s traditional IRA worth \$300,000. His basis was \$0 because every contribution was pre-tax.

• Inherited value: \$300,000
• Step-up applied: \$0 — IRA is IRD, so no step-up
• Taxable income when withdrawn: \$300,000
• If Maria is in the 24% federal bracket: \$300,000 × 24% = \$72,000 federal tax, plus any state tax

If instead this had been a taxable brokerage account worth \$300,000 with a stepped-up basis, Maria could sell immediately and owe \$0 capital gains. Same dollar value, wildly different tax.

Example 2 — Inherited Non-Qualified Annuity (No Step-Up)

David inherits his aunt’s annuity. She paid \$120,000 in premiums; it is now worth \$200,000.

• Premiums (cost basis): \$120,000 — returned tax-free
• Gain (earnings): \$200,000 − \$120,000 = \$80,000 — taxed as ordinary income
• If David is in the 22% bracket: \$80,000 × 22% = \$17,600 federal tax on the earnings

Example 3 — Inherited Stock (Step-Up Applies, for Contrast)

Sarah inherits stock her mother bought for \$15,000, now worth \$95,000.

• Original basis: \$15,000
• Stepped-up basis under IRC §1014: \$95,000
• If Sarah sells at \$95,000: gain = \$0, so \$0 tax
• The \$80,000 of lifetime appreciation is never taxed

The IRD Deduction: Relief for Double Taxation

Large inherited IRAs can be hit twice — once by federal estate tax (if the estate exceeds the \$13.99 million exemption for 2025, rising to \$15 million for 2026), and again by income tax when the heir withdraws. To prevent this double bite, IRC §691(c) gives the recipient an income tax deduction for the estate tax attributable to the IRD.

Here is a simplified worked example. Say an estate of \$2 million includes \$200,000 of IRD, and the estate tax attributable to that IRD is \$5,000. The heir who reports the \$200,000 as income can claim a \$5,000 itemized deduction on Schedule A, spread out as the IRD is received.

The consequence of missing this deduction is paying tax twice on the same money. What you should do: if you inherited IRD from a taxable estate, work with a tax pro to claim the §691(c) deduction in the same year you report the income — it is not subject to the 2% floor, but it must be itemized.

Federal vs. State: Does Your State Follow These Rules?

Federal law sets the basic step-up and IRD rules, but states do not always march in step. Here is how the two layers compare.

Federal vs. State Treatment	What Happens
Federal step-up under IRC §1014	Inherited capital assets reset to date-of-death FMV nationwide for U.S. taxpayers
IRD taxed as ordinary income	Federal rule; most states with an income tax also tax inherited IRA and annuity withdrawals
Community property double step-up	Available only in the 9 community property states
State estate or inheritance tax	A separate tax in about a dozen states, independent of basis

Most states that levy an income tax follow the federal treatment of IRD, so an inherited traditional IRA is usually taxable at the state level too. States with no income tax — such as Florida, Texas, and Nevada — will not tax that withdrawal, which is a genuine and complete advantage, not a loophole.

A handful of states impose their own estate or inheritance tax that can apply even when the federal estate tax does not. What you should do: check your state’s department of revenue rules separately, because state conformity to federal basis and income rules genuinely varies.

Community Property States: The Double Step-Up Advantage

The flip side of “no step-up” is the most generous step-up of all, available only in the 9 community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Tex, Washington, and Wisconsin).

Under IRC §1014(b)(6), when the first spouse dies, both halves of community property step up to FMV — the deceased spouse’s half and the surviving spouse’s half. As tax practitioners describe it, the entire asset is revalued, not just the decedent’s share. Then, when the surviving spouse later dies, the asset steps up a second time for the final heir.

In common-law states, by contrast, only the deceased spouse’s half steps up. What you should do: married couples who move between these state types should review whether community property titling or a community property trust fits their plan.

Common Mistakes to Avoid

These errors cost heirs real money. Each one has a clear downside.

• Treating an inherited IRA as tax-free: you will under-withhold and face a surprise income tax bill, plus possible underpayment penalties.
• Cashing savings bonds before checking the interest election: you may trigger years of deferred interest income in a single year and spike your bracket.
• Missing the 10-year payout deadline on inherited retirement accounts: the SECURE Act can impose penalties on missed required distributions.
• Gifting appreciated property to “help” heirs: you hand them carryover basis and lose the step-up they would have gotten at death.
• Assuming all trust assets step up: assets outside your taxable estate get no step-up under Rev. Rul. 2023-2.
• Forgetting the §691(c) IRD deduction: you pay both estate and income tax on the same dollars with no offset.
• Using the wrong cost basis on inherited stock sales: report the date-of-death value on Form 8949 and Schedule D, not the decedent’s purchase price.
• Spousal beneficiary not rolling over an IRA: a surviving spouse who fails to do a spousal rollover may lose favorable deferral options.

Do’s and Don’ts

Do’s

• Do confirm whether each inherited asset is IRD before you withdraw, because that determines your tax.
• Do spread inherited IRA withdrawals across the 10-year window to control your bracket.
• Do get the annuity’s cost basis from the insurer so you tax only the earnings.
• Do claim the §691(c) deduction when IRD came from a taxable estate to avoid double tax.
• Do keep a date-of-death appraisal for inherited real estate so your step-up holds up on audit.

Don’ts

• Don’t assume “inherited” means “tax-free,” because IRD assets are fully taxable.
• Don’t gift appreciated assets without comparing the lost step-up, since it often raises the total tax.
• Don’t ignore state rules, because state income and estate taxes apply separately from federal.
• Don’t move assets into an irrevocable trust for estate-tax reasons without weighing the lost step-up.
• Don’t miss the alternate valuation date election if it lowers the estate’s value and your basis fits the plan.

Pros and Cons of the No-Step-Up Categories

Pros

• Roth accounts skip the step-up but pay out tax-free, a clear win for heirs.
• Pre-tax retirement accounts let the original owner defer tax for decades while alive.
• IRD income can sometimes be spread over years, smoothing the tax hit.
• The §691(c) deduction softens the blow when estate tax also applied.
• Irrevocable trusts trade the step-up for removing assets from estate tax, which can help very large estates.

Cons

• IRD is taxed at ordinary rates, higher than capital gains rates.
• Heirs face a 10-year deadline that can force income into high-bracket years.
• Gifted appreciated property carries the giver’s low basis, increasing the heir’s gain.
• Trust assets outside the estate lose the step-up entirely under Rev. Rul. 2023-2.
• The rules are easy to misread, leading to costly filing errors.

What to Do Next

Take these steps in order to protect what you inherited.

1. List every inherited asset and label each as IRD (IRA, 401(k), annuity, pension, bonds, unpaid wages) or non-IRD (stocks, home, land).
2. For IRD assets, ask the custodian for the account type and any cost basis, and confirm your 10-year withdrawal deadline.
3. For capital assets, obtain a date-of-death valuation or appraisal to lock in your stepped-up basis.
4. Report inherited asset sales on Form 8949 and Schedule D, using the stepped-up basis where it applies.
5. If the estate paid federal estate tax on IRD, plan to claim the §691(c) deduction the same year you report the income.
6. Call a CPA or estate attorney if the estate is large, includes a trust, crosses state lines, or holds a business interest — this is exactly when professional help (often a few hundred to a few thousand dollars) pays for itself.

This article is educational and not a substitute for advice from a licensed tax or estate professional for your specific situation.

FAQs

Do inherited IRAs get a step-up in basis? No. A traditional IRA is income in respect of a decedent for 2025, so it gets no step-up. The beneficiary pays ordinary income tax on every dollar withdrawn, typically within 10 years of the owner’s death.

Do annuities get a step-up in basis when inherited? No. Inherited non-qualified annuities receive no step-up. The earnings portion above the original premiums is taxed as ordinary income to the beneficiary when paid out.

What is income in respect of a decedent? IRD is untaxed income the decedent had a right to receive before death. Under IRC §691, it keeps the original basis, gets no step-up, and is taxed to whoever collects it.

Do gifted assets get a step-up in basis at death? No. Gifts made during life take the giver’s carryover basis under IRC §1015. Only assets transferred at death generally qualify for a step-up under IRC §1014.

Do Roth IRAs get a step-up in basis? No, but it does not matter. Roth accounts get no step-up, yet qualified distributions to beneficiaries are generally income-tax-free, so there is usually no tax to worry about.

Do assets in an irrevocable trust get a step-up? It depends. Under Rev. Rul. 2023-2, only trust assets included in the grantor’s taxable estate step up. Assets excluded from the estate get no step-up.

Does a surviving spouse get a full step-up on a jointly owned home? Only in community property states. There, the entire home steps up. In common-law states, generally only the deceased spouse’s half steps up.

Are inherited savings bonds taxed? Yes. The accrued interest on Series EE and I bonds is IRD with no step-up, so the heir owes income tax on it when the bonds are cashed or mature.

How much tax will I owe on an inherited 401(k)? Your ordinary income tax rate applies to each withdrawal. A \$100,000 inherited 401(k) for someone in the 24% bracket means roughly \$24,000 in federal tax, plus any state tax.

What is the SECURE Act 10-year rule? Most non-spouse heirs must empty an inherited retirement account within 10 years of the owner’s death. Spreading withdrawals across those years helps avoid bracket spikes.

Does my state tax inherited IRA withdrawals? Usually, if it has an income tax. Most income-tax states follow the federal treatment of IRD. No-income-tax states like Florida and Texas do not tax the withdrawal.

What is the §691(c) deduction? An income tax deduction for the estate tax paid on IRD. It prevents the same dollars from being taxed by both the estate tax and income tax, claimed when the IRD is reported.