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Arkansas Step-Up in Basis Guide
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Arkansas Step-Up in Basis Guide

How step-up in basis works for inherited Arkansas property: a single step-up on the decedent's share under IRC 1014, and how it cuts capital gains tax.

By Settled Editorial

Step-up in basis is one of the quieter tax breaks in an Arkansas estate, and it can save heirs thousands of dollars in capital gains tax. When you inherit property in Arkansas, the tax basis of that property steps up to its fair market value on the date the owner died. Decades of appreciation drop off for tax purposes, and you owe capital gains tax only on any increase in value after you inherited it.

Understanding how the step-up works helps whether you plan to keep inherited property, sell it, or pass it on. This guide explains the rule, shows you how to calculate your new basis, and covers the strategies that make the most of it in Arkansas.

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 mother bought a house in Little Rock in 1985 for $60,000. When she died in 2026, the house was worth $280,000. Without the step-up rule, if she had given you the house as a gift during her lifetime, your basis would have been her original $60,000 (called "carryover basis"). Selling for $280,000 would mean $220,000 in taxable capital gains.

How Step-Up Fixes This

Because you inherited the house instead of receiving it as a lifetime gift, your basis steps up to the fair market value on the date of death: $280,000. If you sell for $280,000, your capital gain is $0. Even if you sell a year later for $295,000, your taxable gain is only $15,000 instead of $235,000.

The Legal Foundation

The step-up comes from Internal Revenue Code Section 1014. Your basis becomes the fair market value at the date of death. It applies to property acquired from a decedent, whether it passes through:

  • Probate
  • A revocable living trust
  • Joint tenancy with right of survivorship (for the decedent's share)
  • A recorded beneficiary deed, Arkansas's transfer-on-death deed
  • A payable-on-death or transfer-on-death beneficiary designation

How Step-Up Works for Arkansas Inherited Property

What Qualifies for Step-Up

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

  • Real estate (homes, farmland, commercial property)
  • Stocks and bonds
  • Mutual funds and ETFs
  • Business interests
  • Collectibles and artwork
  • Personal property of high value

What Does Not Qualify

Some assets do not receive 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, with no basis step-up.
  • 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 transferred within one year of death: If you gave appreciated property to the decedent and it came back to you within one year of their death, no step-up applies (IRC Section 1014(e)).

Arkansas Is a Separate Property State

This is the point that decides how much you save. Arkansas is a common-law, separate-property state, not a community property state. That means:

  • 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.

Arkansas does not get the "double step-up" that community property states give married couples, where the entire asset steps up when the first spouse dies. Here, only the decedent's half adjusts. How a deed or account is titled therefore shapes the surviving spouse's future tax bill, so it is worth reviewing before either spouse dies.

Calculating Your New Tax Basis

Step 1: Determine Fair Market Value at Death

The date-of-death value becomes your new basis. By asset type:

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

Stocks and publicly traded securities: Use the average of the high and low trading prices on the date of death. If the date 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 valuation. The estate may have obtained one for probate or federal estate tax purposes.

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

Step 2: Check for 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). That election is allowed only when it lowers both the gross estate and the federal estate tax, and it applies to the whole estate, not one asset. If it was made, your basis is the value on that alternate date, or the value on the date of sale if the asset sold within the six months.

Most Arkansas estates never file a Form 706, because the federal exclusion is so high, so this election rarely comes up.

Step 3: Add Post-Death Improvements

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

  • Renovations and additions
  • Major upgrades that add value (new roof, new HVAC)
  • Land improvements

Keep receipts for every improvement so you can support the higher basis later.

Example Calculation

ItemAmount
Fair market value at death (your stepped-up basis)$280,000
Kitchen renovation you completed+$25,000
New roof you installed+$12,000
Your adjusted basis$317,000
Sale price$340,000
Taxable capital gain$23,000

Arkansas Capital Gains Tax

Arkansas does not have a separate capital gains rate. It taxes capital gains as part of individual income under Ark. Code 26-51-201, using graduated rates. The top marginal rate is 3.7% for 2026, lowered from 3.9% by the May 2026 special session. Rates and bracket thresholds have changed repeatedly in recent years, so confirm the current top rate and any long-term capital-gains exclusion with the Arkansas Department of Finance and Administration (DFA) before you rely on a number.

Because the gain is taxed as ordinary income, a step-up lowers both your federal and your Arkansas tax when you sell inherited property. If the estate or a trust earns income during administration, that income may require an Arkansas fiduciary income tax return (Form AR1002F) in addition to federal Form 1041.

Deductions That Reduce the Gain

Several costs reduce your taxable gain on a sale:

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

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; the amounts adjust each year for inflation.

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 treated as long-term automatically 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.

No Arkansas Estate or Inheritance Tax

Arkansas has no state estate tax and no state inheritance tax. The state's former estate tax was tied to the federal state death tax credit, which the federal government phased out, so Arkansas has not collected a state death tax since. This means:

  • No Arkansas estate tax on any estate, regardless of size
  • No Arkansas inheritance tax on beneficiaries
  • Only the federal estate tax applies, and only to estates above the federal exclusion ($15,000,000 for deaths in 2026)

The absence of a state death tax changes how you think about the step-up in Arkansas. Here the step-up is about income tax on future capital gains, not about avoiding a state transfer tax, because the state does not levy one.

Planning Strategies to Make the Most of Step-Up

Hold Appreciated Assets Until Death

The most direct move: if you own highly appreciated assets, holding them until death lets your heirs receive the step-up. Selling before death triggers a capital gain that the step-up could have erased.

Avoid Gifting Highly Appreciated Property

When you gift property during your lifetime, the recipient takes your original basis (carryover basis), which wipes out the step-up. For highly appreciated assets, it is almost always better to transfer them at death. Gift lower-gain assets during life if you want to give something away now.

Use a Revocable Living Trust for Probate Avoidance

Property in a revocable living trust receives the same step-up as property that passes through probate, so you keep the tax benefit while skipping the court process. The same is true for a recorded beneficiary deed on real estate. Neither one costs you the step-up. To weigh the process savings, compare using the Arkansas probate fee calculator.

Mind the Surviving Spouse's Basis

Because Arkansas is a separate-property state, only the decedent's half of jointly owned property steps up. Married couples should think about how appreciated property is titled, whether one spouse holds most of the low-basis assets, and whether a trust could better position each share. Arkansas also protects a surviving spouse through dower, curtesy, and homestead rights, which the Arkansas intestate succession guide explains.

Document the Basis

The IRS can question your claimed basis. Protect the step-up by getting date-of-death appraisals, keeping the estate's inventory and valuation records, and saving receipts for every post-inheritance improvement and selling expense.

Step-Up vs. Step-Down

The adjustment runs both ways. If property lost value before death, the basis steps down to the lower fair market value at death. An asset bought for $100,000 but worth $60,000 at death gives the heir a $60,000 basis, and the built-in loss disappears. If an asset carries a built-in loss, it can be better to sell it before death so the loss can be used for tax purposes.

Frequently Asked Questions

Does Arkansas have a double step-up in basis?

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

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

Yes. Arkansas taxes capital gains as part of individual income at its graduated rates, with a top marginal rate of 3.7% for 2026 (Ark. Code 26-51-201). Confirm any long-term capital-gains exclusion with the Arkansas DFA. A step-up reduces the taxable gain, so selling near the stepped-up value produces little or no Arkansas taxable gain.

Does Arkansas have an estate or inheritance tax?

No. There is no Arkansas estate tax and no Arkansas inheritance tax. The state's former estate tax was a federal-credit pickup tax that ended after the federal credit was phased out, so no state death tax applies to current estates.

Do retirement accounts get a step-up in Arkansas?

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 receives the step-up under IRC Section 1014.

Does the step-up apply if there is no probate?

Yes. The step-up applies to property acquired from a decedent whether it passes by probate, a trust, a beneficiary deed, joint survivorship (the decedent's share), or a beneficiary designation.

Related Arkansas Guides

Sources

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