When commercial real estate passes to heirs, a quiet but powerful tax provision comes into play: the step-up in basis. It can wipe out decades of taxable appreciation in a single moment — but only if the value that triggers it is established correctly. For estates and the advisors who guide them, the step-up is one of the strongest reasons to take the date-of-death valuation seriously, even when no estate tax is owed at all.
Here is how the step-up works, why the valuation is the linchpin, and where estates get into trouble.
What the step-up in basis is
An owner’s tax basis in real estate is, broadly, what they paid for it plus capital improvements, less depreciation. When the property is sold, capital gains tax applies to the difference between the sale price and that basis. Over a long holding period, the basis can fall far below market value — meaning a large built-in gain.
The step-up in basis resets that figure. When property transfers at death, the heir’s basis generally becomes the fair market value as of the date of death, rather than the decedent’s original (often much lower) basis. The accumulated appreciation that built up during the decedent’s lifetime effectively escapes income tax. If the heir sells shortly afterward near that value, the taxable gain can be minimal or zero.
For commercial real estate held for decades — and frequently depreciated along the way — the effect is substantial. The date-of-death value becomes the heir’s new starting line.
Why the valuation is the linchpin
The step-up is only as good as the value that establishes it. A higher, well-supported date-of-death value gives the heirs a higher basis — and therefore a smaller taxable gain when they eventually sell. An undervalued or poorly documented figure does the opposite: it can saddle the heirs with an inflated future capital gain, taxing appreciation that should have been stepped up.
This is the point many estates miss. Because so many estates now fall under the federal estate tax exemption — a permanent $15 million per person as of 2026 under the One Big Beautiful Bill Act — executors sometimes assume the valuation does not matter when no estate tax is due. The opposite is true. When no estate tax is owed, the valuation’s main job shifts entirely to setting the basis, and a casual or low figure can quietly cost the heirs far more in future income tax than any estate tax would have been.
Documentation is what makes it defensible
A stepped-up basis is only useful if it survives scrutiny. Years later, when the heirs sell and report their gain, the IRS may ask how the date-of-death value was determined. A figure backed by an independent, professionally developed appraisal — with a documented effective date, a clear definition of value, supported comparables, and reasoned analysis — stands up to that question. A number pulled from a tax assessment, an online estimate, or memory does not.
This is why a date-of-death appraisal functions as insurance for the heirs. The modest cost of establishing the value properly at the outset protects against a far larger exposure if the basis is later challenged or proves unsupportable.
Coordination with the alternate valuation date
In taxable estates, there is a wrinkle worth knowing. The Internal Revenue Code allows an executor to elect an alternate valuation date — generally six months after death — instead of the date of death, but only when doing so reduces both the gross estate and the estate tax. Because the values used for estate tax and for the step-up are linked, that election affects the heirs’ basis as well. This interplay is exactly the kind of decision where the estate’s CPA or attorney and an independent appraiser work together: the advisor weighs the tax election, and the appraiser supplies credible values for the relevant dates.
Where estates get into trouble
A few recurring mistakes undermine the step-up:
- Treating the valuation as a formality when no estate tax is owed, and accepting a weak number that hurts the heirs at sale.
- Relying on assessed value for commercial property, where assessed and market values often diverge significantly.
- Waiting years to document the value, then trying to reconstruct it without the contemporaneous market evidence that makes it credible.
- Overlooking the basis consequences entirely, so the estate optimizes for the wrong tax.
Each of these is avoidable with an independent appraisal obtained at the right time.
The bottom line
The step-up in basis can erase a lifetime of appreciation on commercial real estate — but only when the date-of-death value that sets it is accurate and well documented. For most estates today, no estate tax is due, which makes the valuation’s role in setting the heirs’ basis the main event, not a side note. An independent, defensible appraisal is what turns the step-up from a hopeful assumption into a number the heirs can rely on when they sell.
SM RE Inc. prepares independent date-of-death valuations for commercial real estate across Southern California — documented to support both estate tax reporting and a defensible stepped-up basis. Learn more on our Estate & Gift Tax Valuations page, or contact us to discuss a matter. This article is general information, not tax or legal advice; consult the estate’s CPA or attorney.
Frequently asked questions
What is a step-up in basis?
It is the adjustment of an inherited asset’s tax basis to its fair market value at the date of death. The heir’s basis “steps up” from the decedent’s original cost to the date-of-death value, so appreciation during the decedent’s life generally escapes capital gains tax.
Does the step-up matter if my estate owes no estate tax?
Yes — arguably more. When no estate tax is due, the date-of-death valuation’s primary purpose is to establish the heirs’ basis. A low or undocumented value can create a large taxable gain when they sell, so an accurate appraisal still protects them.
How do I prove the date-of-death value to the IRS later?
With an independent appraisal prepared to professional standards, documenting the effective date, the basis of value, and the supporting data. That contemporaneous record is what defends the stepped-up basis if it is questioned at the time of sale.