Pennsylvania Step-Up in Basis Guide

Pennsylvania step-up in basis rules can save heirs thousands of dollars in capital gains tax. When you inherit property in Pennsylvania, the tax basis of that property steps up to its fair market value on the date of the owner's death. Decades of appreciation drop away for tax purposes, and you owe capital gains tax only on any increase in value after you inherit it.

The step-up matters most when you sell. It also sits next to a separate Pennsylvania tax that families often confuse it with: the Pennsylvania inheritance tax. This guide explains how the step-up works, shows how to calculate your new basis, and draws a clear line between the step-up (an income tax rule) and the inheritance tax (a separate tax on what you receive).

What Is Step-Up in Basis?

When someone buys property or an asset, they have a "tax basis" in it, usually equal to 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

Imagine your father bought a house in Pittsburgh in 1988 for $70,000. When he died in 2026, the house was worth $300,000. If he had given you the house as a gift during his lifetime, your basis would have stayed at his original $70,000 (called carryover basis). Selling for $300,000 would mean $230,000 in taxable capital gains.

How Step-Up Fixes This

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: $300,000. If you sell for $300,000, your capital gain is $0. Even if you sell a year later for $315,000, your taxable gain is only $15,000 instead of $245,000.

The Legal Foundation

The step-up comes from Internal Revenue Code Section 1014(a), which sets the basis of property acquired from a decedent at its fair market value on the date of death. It applies to property that passes through:

• Probate
• A trust
• Joint tenancy with right of survivorship (for the decedent's share)
• Payable-on-death or transfer-on-death accounts
• Beneficiary designation

How Step-Up Works for Pennsylvania Inherited Property

What Qualifies for Step-Up

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

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

What Does Not Qualify

Some assets receive no 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.
• Property gifted before death: If the decedent gave you the property during their lifetime, you generally take their original basis (carryover basis) under IRC Section 1015.
• Assets you gave the decedent within one year of death: If you gave appreciated property to the decedent and it returned to you within one year of their death, no step-up applies (IRC Section 1014(e)).

Separate Property, Not Community Property

Pennsylvania is a common-law separate property state, not a community property state. That distinction changes how much of a jointly owned asset steps up:

• 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, or as tenants by the entireties, only half the property steps up when the first spouse dies.
• The surviving spouse's half keeps its original basis.

This is the single step-up. It differs from community property states, where IRC Section 1014(b)(6) steps up the entire asset when the first spouse dies. Pennsylvania heirs do not get that 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. Get a professional appraisal for real estate as of the date of death (the estate may already have one from the probate inventory), use the average of the high and low trading prices for publicly traded securities, and use a professional valuation for closely held business interests. The next section covers each asset type in more detail. Keep the documentation.

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 election is allowed only when it lowers both the gross estate and the federal estate tax. If it was made, your basis is the value on that alternate date, or the date of disposition for anything sold within six months. Because it applies only to estates above the federal exclusion, few Pennsylvania families ever reach it.

Step 3: Add Post-Death Improvements

After you inherit, capital improvements you make increase your basis:

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

Keep receipts for the work.

Example Calculation

Step-Up for Different Asset Types

Real Estate

Real estate is the most common asset where the step-up matters. In Pennsylvania, inherited real estate can pass through several channels:

• Probate: The stepped-up basis carries to the heir who receives the property through Pennsylvania probate.
• 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.

Stocks and Securities

Each security held at death steps up to its date-of-death value, which helps most with shares held for decades. Mutual fund basis steps up to the net asset value on the date of death. Ask the broker for a date-of-death statement, which most firms provide.

Family Businesses

Business interests receive a step-up, though 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, vehicles, and other property of value all step up. Document the date-of-death value with appraisals.

Pennsylvania Capital Gains Tax

Pennsylvania has no separate capital gains rate. It taxes net gains from the sale or disposition of property as one of its classes of personal income, at its flat rate. That rate is 3.07% under 72 P.S. Section 7302, and unlike the federal system, Pennsylvania does not offer a lower rate for long-term gains. The same 3.07% applies whether you held the asset for one month or forty years.

Because the step-up lowers the gain you report, it lowers both your federal and your Pennsylvania tax when you sell inherited property. Pennsylvania also lets you reduce the taxable gain by:

• Selling expenses (real estate commissions, closing costs)
• Legal and accounting fees related to the sale
• Capital improvements, which add to your basis

If an estate or trust earns income during administration, that income may require a Pennsylvania fiduciary income tax return in addition to federal Form 1041.

Federal Capital Gains Tax

At the federal level, long-term capital gains (assets held more than one year) receive lower rates than ordinary income. The rate is 0%, 15%, or 20% depending on your taxable income, and the income thresholds adjust each year for inflation, so check the current-year figures.

Net Investment Income Tax

An extra 3.8% tax applies to net investment income, including capital gains, for individuals with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly).

Holding Period for Inherited Property

Inherited property is automatically treated as long-term under IRC Section 1223(9), no matter how long the decedent or the heir actually held it. You qualify for the lower long-term rates even if you sell the day after you inherit.

Pennsylvania Inheritance Tax vs. Step-Up in Basis

This is the point Pennsylvania families most often get wrong, so it is worth slowing down. The step-up in basis and the Pennsylvania inheritance tax are two different taxes that answer two different questions.

The step-up in basis is an income tax rule. It changes the capital gains tax you owe if and when you sell inherited property. If you never sell, the step-up never comes into play. It reduces or erases the gain.

The Pennsylvania inheritance tax is a separate tax on the value you receive, and it turns on who inherits, not on whether anything is sold. The rate is set by the heir's relationship to the decedent:

Pennsylvania does not use an estate-level exemption threshold for this tax the way a state estate tax would. The rate is applied by beneficiary class, and it is due when the person dies. Payment becomes delinquent nine months after death, and paying within three months earns a 5% discount. Property owned jointly between spouses is exempt, and Pennsylvania Revenue lists other exemptions. For the filing process, see the Pennsylvania inheritance tax return guide.

Two practical takeaways follow from keeping these taxes separate:

• The step-up does not reduce your inheritance tax. A child who inherits a $300,000 house owes Pennsylvania inheritance tax at 4.5% on its value regardless of the step-up. The step-up only helps later, by lowering the capital gain if the child sells.
• A revocable living trust avoids probate, not the inheritance tax. Assets that pass through a trust still fall under the Pennsylvania inheritance tax. The trust changes how property moves, not whether the tax applies.

Pennsylvania has no separate state estate tax, so at the state level the two taxes to plan around are the inheritance tax on what heirs receive and the 3.07% income tax on any gain when they sell. For how the federal estate tax reaches large Pennsylvania estates, see the Pennsylvania and the federal estate tax guide.

Planning Strategies to Maximize the Step-Up

Hold Appreciated Assets Until Death

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

Gift Low-Basis Assets, Keep Appreciated Ones

When you gift property during your lifetime, the recipient takes your original basis (carryover basis) and loses the step-up. If you plan to give assets away, give the ones with little built-in gain and keep the highly appreciated assets in your estate for the step-up.

Use a Revocable Living Trust for Probate, Not Tax Relief

Property in a revocable living trust receives the same step-up as property passing through probate, so a trust gives your family probate avoidance without giving up the income tax benefit. Just remember it does not avoid the Pennsylvania inheritance tax. See the Pennsylvania revocable living trust guide and the guide on how to avoid probate in Pennsylvania. To weigh the cost of probate against a trust, use the Pennsylvania fee calculator or read about Pennsylvania probate costs.

Think About the Surviving Spouse's Half

Because Pennsylvania is a separate property state, only the decedent's half of jointly owned property steps up. Married couples should think about how property is titled, whether one spouse holds far more appreciated assets, and whether a trust plan can position each spouse's share for a step-up.

Watch for a Step-Down

The adjustment works both ways. If property is worth less at death than the decedent paid, the basis steps down to the lower date-of-death value, and the built-in loss disappears. When an asset carries a built-in loss, selling it before death can let the loss be used for tax purposes.

Keep Your Records

The IRS can challenge a claimed basis. Protect the step-up by keeping date-of-death appraisals, the estate inventory filed with the Register of Wills, brokerage date-of-death statements, receipts for post-inheritance improvements, and the settlement statement from any sale. Hold these papers for at least three years after you file the return that reports the sale.

Frequently Asked Questions

Does Pennsylvania have a double step-up in basis?

No. Pennsylvania is a common-law separate property state, so under IRC Section 1014 only the decedent's share of jointly owned property steps up. The surviving co-owner's share keeps its original basis. The double step-up under IRC Section 1014(b)(6) applies only in community property states.

Is the Pennsylvania inheritance tax the same as the step-up in basis?

No. They are two different taxes. The step-up in basis is an income tax rule that lowers the capital gains tax you owe if and when you sell inherited property. Pennsylvania inheritance tax is a separate tax on the value you receive, set by your relationship to the decedent (0% for a spouse, 4.5% for children and grandchildren, 12% for siblings, 15% for other heirs). You can owe inheritance tax on an inherited asset and still get a step-up that reduces capital gains at a later sale. One does not cancel the other.

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

Yes. Pennsylvania taxes net gains from the sale of property as part of personal income at its flat 3.07% rate under 72 P.S. Section 7302. There is no separate or lower state rate for long-term gains. A step-up reduces the taxable gain, so selling at the stepped-up value often leaves little or no Pennsylvania taxable gain.

Do retirement accounts get a step-up in Pennsylvania?

No. Traditional IRAs and 401(k)s are income in respect of a decedent, so they receive no basis step-up. Beneficiaries owe ordinary income tax on withdrawals. These accounts can also fall under Pennsylvania inheritance tax, which is a separate question from income tax.

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 that passes at death receives the step-up under IRC Section 1014.

Can I sell inherited Pennsylvania property right away and still get the step-up?

Yes. Your basis is the date-of-death value, and inherited property is treated as long-term under IRC Section 1223(9). A sale soon after death still qualifies for long-term capital gains rates at the federal level.

Related Pennsylvania Guides

• Selling Inherited Property in Pennsylvania
• Pennsylvania Probate Guide
• Pennsylvania Inheritance Tax
• Pennsylvania Revocable Living Trust
• How to Avoid Probate in Pennsylvania
• Pennsylvania Fee Calculator

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