Skip to main content
Alabama Step-Up in Basis Guide
Support GuideAlabama13 min read

Alabama Step-Up in Basis Guide

How the step-up in basis works on inherited property in Alabama: a single step-up under IRC Section 1014 for this separate-property state, plus capital gains tax.

By Settled Editorial

When you inherit property in Alabama, the tax basis of that property "steps up" to its fair market value on the date the owner died. That single adjustment can erase decades of appreciation for capital gains purposes, so you owe tax only on the increase in value after you inherited it. This guide explains how the step-up works for an Alabama heir, how to calculate your new basis, and how the state taxes any gain when you sell.

Alabama is a separate-property (common-law) state, so the rules here are different from a community property state. Understanding that difference matters whether you plan to keep an inherited asset, sell it, or move it into a revocable living trust.

What Is Step-Up in Basis?

When someone buys an asset, they have a "tax basis" in it, usually what they paid. When they sell, they owe capital gains tax on the difference between the sale price and that basis.

The Problem Without Step-Up

Suppose your father bought a house in Huntsville in 1988 for $70,000. When he died in 2026, the house was worth $320,000. If he had given you the house during his lifetime, you would take his original $70,000 basis (called "carryover basis"). Selling for $320,000 would produce a $250,000 taxable gain.

How the Step-Up Fixes It

Because you inherited the house instead of receiving it as a gift, your basis steps up to the fair market value on the date of death: $320,000. Sell for $320,000 and your capital gain is $0. Sell a year later for $335,000 and your taxable gain is only $15,000 rather than $265,000.

The Legal Foundation

The step-up comes from Internal Revenue Code Section 1014. It applies to property acquired from a decedent, whether the asset passes through:

  • Probate
  • A trust
  • Joint tenancy with right of survivorship (for the decedent's share)
  • A beneficiary or payable-on-death designation

Inherited property is also treated as long-term automatically under IRC Section 1223(9), so a sale soon after death still gets the lower long-term rates rather than the higher short-term rates.

How Step-Up Works for Alabama Inherited Property

What Qualifies for a Step-Up

Nearly all capital assets inherited from a decedent receive a step-up:

  • Real estate (homes, land, commercial property)
  • Stocks, bonds, mutual funds, and ETFs
  • Business interests
  • Collectibles and artwork
  • Personal property that carries value

What Does Not Qualify

Some assets never get a step-up:

  • Income in respect of a decedent (IRD): Traditional IRAs, 401(k)s, and other tax-deferred retirement accounts. Distributions are taxed as ordinary income to the beneficiary, and inherited retirement accounts are often the most heavily taxed assets in an estate.
  • Property gifted before death: If the decedent gave you the asset during their lifetime, you generally take their original basis under IRC Section 1015 (carryover basis).
  • Assets returned within one year of death: If you gave property to the decedent and it came back to you within one year of their death, no step-up applies (IRC Section 1014(e)).

Separate Property Means a Single Step-Up

Alabama is a separate-property (common-law) state, not a community property state. That distinction drives who gets the step-up on jointly owned property:

  • Only the decedent's share of jointly owned property receives a step-up.
  • If spouses own a home as joint tenants with right of survivorship, only half the property steps up when the first spouse dies.
  • The surviving spouse's half keeps its original basis.

This is the opposite of a community property state, where both halves of community property can step up at the first death. Alabama has no double step-up.

Calculating Your New Tax Basis

Step 1: Determine Fair Market Value at Death

The date-of-death value becomes your new basis. How you prove it depends on the asset:

Real estate: Get a professional appraisal as of the date of death. The estate may already have one from the probate inventory. Keep this documentation.

Stocks and publicly traded securities: Use the average of the high and low trading prices on the date of death. If death falls on a weekend or holiday, average the trading prices from the business days before and after.

Closely held business interests: These need a professional business valuation, which the estate may have obtained for probate.

Personal property: Use appraisals for high-value items and comparable sales for the rest.

Step 2: Check the Alternate Valuation Date

If the estate filed a federal estate tax return (Form 706), the executor may have elected the alternate valuation date, which is six months after death (IRC Section 2032). The law allows this election only when it lowers both the gross estate and the federal estate tax. Because it applies only to estates above the federal exclusion, it rarely reaches an Alabama family.

Step 3: Add Post-Death Improvements

After you inherit, capital improvements you make add to your basis:

  • Renovations and additions
  • Major improvements that add value, such as a new roof or new HVAC system
  • Land improvements

Keep receipts for the work.

Example Calculation

ItemAmount
Fair market value at death (your stepped-up basis)$320,000
Kitchen renovation you completed+$28,000
New roof you installed+$12,000
Your adjusted basis$360,000
Sale price$385,000
Taxable capital gain$25,000

Step-Up for Different Asset Types

Real Estate

Real estate is where the step-up matters most, especially when heirs plan to sell. Our guide on selling inherited property in Alabama walks through how the date-of-death basis lowers the gain on a sale. Inherited Alabama real estate can reach you through several channels:

  • Probate: The estate takes the stepped-up basis and passes it to the heir. Use our Alabama probate fee calculator to estimate what settling the estate costs.
  • Trust: Property held in a revocable living trust receives the same step-up as probate property.
  • Survivorship deed: The decedent's share steps up. The surviving owner's share does not.

Alabama has no transfer-on-death deed for real estate, so a funded trust is the main way to keep a home out of probate while preserving the step-up. When a deed does record an estate transfer, Alabama charges a deed recording privilege tax of $0.50 per $500 of value under Ala. Code 40-22-1, with exemptions for certain nominal-consideration deeds that only perfect title.

Stocks and Securities

Each security held at death steps up to its date-of-death value. This helps most with stock held for decades. Mutual funds step up to the net asset value on the date of death. Ask the broker for a date-of-death statement.

Family Businesses

Business interests receive a step-up, and the mechanics depend on the entity:

  • Sole proprietorship: Each business asset steps up individually.
  • Partnership or LLC: The inherited interest steps up, and a Section 754 election can adjust the inside basis of the entity's assets.
  • S corporation: The stock basis steps up, but the inside basis of corporate assets does not change.

Collectibles and Personal Property

Art, antiques, jewelry, and vehicles step up too. Document their values with appraisals as of the date of death.

Alabama Capital Gains Tax

Alabama does not have a separate capital gains rate. It taxes capital gains as ordinary income under its individual income tax (Ala. Code 40-18-5). The rates are graduated: 2% on the first band of taxable income, 4% on the middle band, and 5% on income above the top threshold, so the top marginal rate is 5%. For a single or separate filer in 2026, the 5% rate starts on taxable income over $3,000, which means most inherited-property gains fall in the top band.

Because Alabama taxes the gain as ordinary income, a step-up lowers both your federal and your Alabama tax when you sell. Selling expenses such as real estate commissions and closing costs, plus any capital improvements you made, reduce the gain before tax applies. If an estate or trust earns income during administration, that income may require an Alabama fiduciary income tax return in addition to federal Form 1041. Confirm the current filing threshold with the Alabama Department of Revenue.

Federal Capital Gains Tax

At the federal level, long-term capital gains (assets held more than one year) get preferential rates:

Filing Status0% Rate15% Rate20% Rate
SingleUp to $48,350$48,351 to $533,400Over $533,400
Married Filing JointlyUp to $96,700$96,701 to $600,050Over $600,050

These are 2025 thresholds and adjust annually for inflation.

An extra 3.8% net investment income tax can apply to capital gains once modified adjusted gross income passes $200,000 (single) or $250,000 (married filing jointly). And because inherited property counts as long-term under IRC Section 1223(9), you qualify for these lower rates even if you sell the day after you inherit.

No Alabama Estate or Inheritance Tax

Alabama has no state estate tax and no inheritance tax. The old state estate tax under Ala. Code 40-15-2 was a "pickup" tax tied to the federal state death tax credit, and it became inoperative once federal law phased that credit out. The Alabama Department of Revenue states that estates of decedents dying after December 31, 2004 do not file an Alabama estate tax return.

So in Alabama the step-up is about income tax on future capital gains, not about dodging a state death tax, because the state does not levy one. The federal estate tax reaches only estates above the federal exclusion ($15,000,000 per person for deaths in 2026), so it affects very few families. Portability can still matter for a married couple, but it requires a timely election on a federal return.

Step-Up vs. Step-Down

The adjustment runs both ways. If property lost value since it was purchased, the basis steps down to the lower value at death.

Example:

  • Stock purchased for $100,000
  • Worth $60,000 at death
  • Heir's basis: $60,000

If the heir sells for $60,000, there is no loss to deduct. The built-in loss disappeared at death. If an asset carries a built-in loss, it can be better to sell it before death so the loss can be used.

Planning Strategies

Hold Appreciated Assets Until Death

If you own highly appreciated assets, holding them until death lets your heirs take a full step-up. Selling during life triggers capital gains tax that the step-up would have removed.

Do Not Gift Highly Appreciated Property

Gifting an appreciated asset hands the recipient your original basis (carryover basis) and wipes out the step-up. If you want to give during life, give assets with little built-in gain and keep the appreciated ones in your estate.

Use a Revocable Living Trust

Property in a revocable living trust gets the same step-up as property that passes through probate, so a funded trust gives you probate avoidance without giving up the tax benefit. See how a trust fits your situation in the Alabama revocable living trust guide and other ways to avoid probate in Alabama.

Mind the Surviving Spouse's Basis

Because Alabama gives only a single step-up, a married couple should think about how appreciated property is titled and whether one spouse holds most of the appreciated assets. Titling and trust choices affect how much of the property steps up at the first death.

Keep Documentation

The IRS can question a claimed basis. Protect the step-up by getting appraisals at the time of death, keeping the probate inventory and valuation documents, and saving receipts for every post-inheritance improvement and selling expense.

Frequently Asked Questions

Does Alabama have a double step-up in basis?

No. Alabama is a separate-property (common-law) state, so only the decedent's share of jointly owned property steps up under IRC Section 1014. The surviving co-owner keeps their original basis. The double step-up exists only in community property states.

Does Alabama tax the capital gain when I sell inherited property?

Alabama taxes capital gains as ordinary income at graduated rates up to 5% (Ala. Code 40-18-5). A step-up lowers the taxable gain, so selling at the stepped-up value produces little or no Alabama gain.

Does Alabama have an estate or inheritance tax?

No. Alabama has no state estate tax and no inheritance tax for deaths after December 31, 2004. Only the federal estate tax can apply, and only to estates above the federal exclusion.

Do retirement accounts get a step-up in Alabama?

No. Traditional IRAs and 401(k)s are income in respect of a decedent, so they do not receive a basis step-up. Beneficiaries owe ordinary income tax on withdrawals.

What if I received the property as a gift before death?

Lifetime gifts take a carryover basis under IRC Section 1015, not a stepped-up basis. Only property transferred at death gets the step-up under IRC Section 1014.

Can I use the home sale exclusion on inherited property?

Only if you lived in the inherited home as your main residence for at least two of the five years before you sell. You cannot claim it just because the decedent lived there.

Related Alabama Guides

Sources

Last Updated: July 2026. This guide provides general information about the step-up in basis for Alabama inherited property. Tax situations vary by individual. Consult a tax professional or CPA for advice specific to your situation. It is not legal advice.