Step-up in basis is a tax rule that can save your heirs thousands of dollars. When you pass away, the tax value of what you own resets to its current market value. This can wipe out years of capital gains. Here is how it works and why it matters.
What Is Step-Up in Basis?
Every asset has a tax basis. This is usually what you paid for it. When you sell, you owe taxes on the gain. The gain is the gap between your basis and the sale price.
Here is a simple example:
- You bought your home for $150,000
- Today it is worth $450,000
- If you sell now, you have a $300,000 gain (before any exclusions)
But at death, something key happens. Your heirs get a step-up in basis. The tax basis resets to market value at the date of death, which is $450,000. If they sell for $450,000, their taxable gain is zero. All $300,000 in growth is erased for tax purposes.
That is what step-up in basis means. The original price no longer matters.
How Does Step-Up in Basis Work in Arizona?
Arizona is a community property state. This creates an extra edge most people do not know about.
In other states, when one spouse dies, only the deceased spouse's half of jointly owned property gets a step-up. The living spouse's half keeps the old basis.
In Arizona, both halves of community property get a step-up when either spouse dies. The entire property, not just half, resets to current market value. For a couple who has owned their home for 30 years, this double step-up can erase hundreds of thousands of dollars in possible capital gains.
Which Assets Qualify for a Step-Up?
This tax rule applies to most types of property:
- Real estate: Homes, rental units, vacation homes, and land
- Stocks and bonds: Shares and mutual funds in taxable accounts
- Business interests: Shares in LLCs, partnerships, and closely held companies
- Personal property: Art, items of value, and other assets that grew in worth
Some assets do not get a step-up:
- Retirement accounts like IRAs and 401(k)s. Payouts from these are taxed as regular income no matter when they are taken
- Assets gifted while you are alive. Gifts carry the original basis. They do not reset at death
Why Step-Up in Basis Matters for Estate Planning
This rule can change how families think about giving and passing on wealth. For example, gifting a stock that has grown a lot passes your low basis to the person who gets it. But if you hold that stock until death, your heirs get the new, higher market value as their basis. The capital gains simply go away.
This is why estate planning lawyers often suggest holding assets that have grown in value rather than giving them away early. The step-up only happens at death.
Step-Up vs. Estate Tax
Step-up in basis is separate from estate taxes. A living trust does not create or remove a step-up. It just makes the transfer to heirs faster and avoids the cost and delay of probate court.
Arizona has no state estate tax and no state inheritance tax. The federal estate tax only kicks in for estates over about $14 million per person (2025 limit). For most families, there will be no estate tax. Step-up in basis will save real money on capital gains when heirs sell what they receive.
A solid estate plan takes full advantage of this tax rule. It is one of the most useful benefits a family can get.
Related guide: If you have just inherited property and want to lock the step-up in correctly, read our guide on Estate Planning When You Inherit Property in Arizona.
For the full Arizona walkthrough of federal estate, gift, and GST tax planning, including portability, the lifetime exemption, and annual exclusion gifts, read our pillar guide: Estate, Gift & GST Tax in Arizona: The Complete Guide.