Last updated: August 24, 2026
When you inherit stock, a house, or a portfolio, the first tax question is usually the scariest one: if I sell this, how much of it goes to taxes? For most heirs, the answer is far better than they expect, because of one of the most powerful provisions in the tax code. It's called the step-up in basis, and if you inherit assets in Texas, a community property rule can make it even more generous.
This is the piece that decides whether selling an inherited asset triggers a big capital gains bill or almost none. For a high-net-worth family, getting it right, and knowing what does not qualify, is worth real money.
What the step-up in basis actually does
Your "basis" in an asset is essentially what you have invested in it for tax purposes. When you sell, you pay capital gains tax on the difference between the sale price and your basis. Buy stock for $20,000, sell it for $205,000, and you're taxed on $185,000 of gain.
Inheritance changes that. When you inherit an asset, your basis is generally reset to its fair market value on the date the previous owner died. That reset is the step-up. All the appreciation that built up during the decedent's lifetime simply disappears for income-tax purposes.
Take that same stock. Say your father bought it for $20,000 decades ago and it was worth $200,000 the day he died. Your basis becomes $200,000, not $20,000. If you sell it soon after for $205,000, your taxable gain is $5,000, not $185,000. The lifetime of growth that would have been taxed if he'd sold it while alive is wiped clean when it passes to you. Inherited assets also get automatic long-term treatment, so even if you sell the next week, you get long-term capital gains rates rather than higher short-term ones.
This is sometimes described, only half-jokingly, as one of the biggest breaks in the tax code, because appreciation that would have been taxed if the owner sold during life escapes income tax entirely at death. Whether or not that's sound policy, it's the law, and for heirs it's overwhelmingly good news. It's also why planners often advise holding highly appreciated assets until death rather than selling them late in life and paying the gains along the way.
The Texas advantage: the community property double step-up
Texas heirs do meaningfully better than heirs in most of the country here, and it's an advantage national articles routinely miss.
In a community property state like Texas, when the first spouse dies, the entire community asset gets a step-up to fair market value, not just the deceased spouse's half. In a common-law state, only the deceased spouse's half steps up; the surviving spouse keeps their original low basis on their own half. That difference, the "double step-up," can save an enormous amount of capital gains tax for the surviving spouse.
An example makes it concrete. Say a married couple owns community property stock with a combined basis of $50,000, now worth $500,000, and one spouse dies:
| At the first spouse's death | Community property state (Texas) | Common-law state |
|---|---|---|
| Whose half steps up to FMV | Both halves | Only the deceased spouse's half |
| Surviving spouse's new basis | $500,000 (full value) | About $275,000 |
| Taxable gain if sold at $500,000 | $0 | About $225,000 |
In Texas, the survivor could turn around and sell the whole position for $500,000 with essentially no capital gains tax. In a common-law state, the same sale could generate roughly $225,000 of taxable gain on the half that never stepped up. For a couple holding highly appreciated stock or real estate, this single rule is one of the quiet financial advantages of being a Texas resident.
What does not get a step-up
The step-up is powerful, but it is not universal, and assuming it applies to everything is a costly mistake.
Retirement accounts do not get a step-up. An inherited traditional IRA or 401(k) carries no basis reset, and withdrawals are taxed as ordinary income to the beneficiary, because that money was never taxed on the way in. This is one reason inheriting a taxable brokerage account is often far more tax-friendly than inheriting an equal-sized traditional IRA.
Assets given away during the owner's lifetime also miss out. When someone gifts you an appreciated asset while alive, you generally take their original basis, called carryover basis, not a stepped-up one. That's why gifting highly appreciated stock to your heirs during life can be worse for them than simply leaving it to them at death, when it would step up. And certain assets held in irrevocable trusts that are not included in the decedent's taxable estate may not qualify for a step-up either, which is a planning detail worth checking rather than assuming.
The through-line: the step-up is tied to assets that pass at death and are included in the estate. Move an asset outside that path, and you can lose the benefit.
Will you owe tax when you sell?
For most inherited assets sold soon after death, the answer is little or nothing, precisely because the basis was just reset to date-of-death value. You only owe capital gains tax on appreciation that happens after you inherit.
So if you inherit a home valued at $400,000 and sell it a year later for $430,000, your gain is roughly the $30,000 of post-inheritance appreciation, not decades of the prior owner's gains. That gain would be taxed at long-term capital gains rates, generally 0%, 15%, or 20% depending on your income, plus the 3.8% net investment income tax for higher earners. Selling quickly usually keeps the taxable gain small; holding for years means more post-inheritance growth that can eventually be taxed.
Keep good records of the date-of-death value. An appraisal for real estate or the closing price for securities on that date is what establishes your stepped-up basis, and you'll want that documentation when you eventually sell.
One wrinkle worth knowing: in some cases the estate can elect to value assets six months after the date of death instead, using what's called the alternate valuation date, which can matter if values fell after death. That election is made at the estate level, so check with whoever administers the estate before you assume which value is your basis.
What Texas changes
Texas helps on two fronts here. First, there is no state income tax, so any capital gain you do owe is taxed only at the federal level, with no state capital gains tax stacked on top. Second, the community property double step-up gives married Texas couples a basis advantage that residents of most other states simply don't get.
One thing Texas does not change is the federal estate tax, which is a separate matter from the income-tax step-up. Most families never owe it, since the federal exclusion is $15 million per person in 2026, but the step-up applies regardless of whether any estate tax is due. In other words, you get the basis reset even if the estate is nowhere near the estate tax threshold.
Inherited assets and unsure about your basis?
We help Houston-area families document date-of-death values and figure the real tax on selling inherited stock, real estate, or a portfolio.
The Bottom Line
The step-up in basis is the reason inheriting an appreciated asset and selling it usually generates little capital gains tax: your basis resets to the date-of-death value, erasing the prior owner's lifetime of growth. In Texas, the community property rules go further, stepping up both halves of a married couple's community property when the first spouse dies, which can save the survivor a large capital gains bill later. But not everything qualifies. Retirement accounts and lifetime gifts don't get the step-up, and some trust assets may not either.
For a family inheriting significant assets, the difference between handling this well and handling it carelessly is measured in real tax dollars. If you've inherited stock, real estate, or a portfolio and you're not sure about your basis or the tax on a sale, that's worth a conversation with a CPA who works with estates. It's part of what our team does in year-round tax planning for Houston-area families.
