Step-Up in Basis: How Inherited Property Is Taxed in Florida

What "Step-Up in Basis" Actually Means

Cost basis is the number the IRS uses to calculate a taxable gain when an asset is sold — generally what the owner originally paid for it, adjusted over time. When someone inherits property, that basis doesn't carry over from the person who died. Instead, it resets, or "steps up," to the property's fair market value as of the date of death. If a house purchased decades ago for $80,000 is worth $450,000 when the owner dies, the heir's basis becomes $450,000, not $80,000. Sell it shortly after inheriting, and there's often little or no capital gains tax due, even though the original owner would have owed tax on the full $370,000 of appreciation if they'd sold it themselves.

Inherited property also gets an automatic benefit on the holding period: it's treated as long-term regardless of how long the deceased owned it or how quickly the heir sells, which means it qualifies for the more favorable long-term capital gains rates rather than short-term rates taxed as ordinary income.

Why Joint Titling in Florida Can Cost Heirs Money

This is where Florida families often get an unpleasant surprise. Florida is not a community property state, so property titled jointly between spouses — as joint tenants with right of survivorship or tenants by the entirety — generally only gets a step-up on the portion attributable to the spouse who died. The surviving spouse's half keeps its original, lower basis.

Consider a couple who bought their home decades ago for $200,000, held jointly, now worth $600,000. When one spouse dies, only their half — $300,000 of value — steps up. The survivor's basis becomes a blend: $100,000 (their original half of the purchase price) plus $300,000 (the stepped-up half), for a combined basis of $400,000 rather than the full $600,000. If the survivor later sells for $600,000, they owe capital gains tax on $200,000 of appreciation that a full step-up would have erased entirely.

Some married couples address this with a Florida Community Property Trust, a relatively newer planning tool that allows spouses to elect community property treatment for specific assets. Property held in a properly structured community property trust can receive a full step-up on both halves at the first spouse's death — sometimes called a "double step-up." This is a more advanced strategy that isn't right for every couple, and the IRS hasn't issued definitive guidance addressing every scenario, so it's worth discussing with an attorney before relying on it.

What Doesn't Get a Step-Up

The step-up is generous, but it doesn't apply to everything:

• Retirement accounts. IRAs, 401(k)s, and similar tax-deferred accounts don't receive a step-up in basis. Beneficiaries generally owe ordinary income tax as they take distributions, under a separate set of rules for inherited retirement accounts.
• Lifetime gifts. If you give appreciated property away while you're alive rather than leaving it at death, the recipient inherits your original, lower basis — not a stepped-up one. This is a major reason estate planning attorneys often advise holding significantly appreciated assets until death rather than gifting them during life, when other planning goals allow for it.

How Trusts Fit Into the Picture

Whether trust-held property gets a step-up depends heavily on how the trust is structured. Assets in a standard revocable living trust are generally treated as still belonging to the person who created it for tax purposes, so they typically receive the same step-up they would have gotten if held individually — one of several reasons a revocable trust doesn't sacrifice this tax benefit in exchange for avoiding probate. Irrevocable trusts are a different story: depending on how the trust is drafted and whether the assets are considered part of the grantor's taxable estate, a step-up may or may not apply. This is a detail worth getting right before assets go into an irrevocable structure, not after.

Why This Matters for Your Estate Plan

The step-up in basis is one of the reasons the way you title property and structure your estate plan matters as much as what the plan says on paper. The same asset, held two different ways, can produce very different tax outcomes for the people who inherit it. Reviewing how significant assets — the family home, investment accounts, rental property — are titled is a worthwhile part of any estate plan review, particularly for married couples in Florida's common-law property system.