Step-Up in Basis vs the New York Estate Tax Cliff

A Brooklyn brownstone bought for $90,000 in 1985 and worth $2,100,000 today carries about $2,000,000 of paper gain. Whether anyone ever pays income tax on that gain turns on one rule: the step-up in basis under IRC Section 1014.

Sell it the week before death, and the gain is taxed by both Washington and Albany. Pass it at death, and the heir's basis resets to $2,100,000, wiping the slate clean.

New York adds two twists that Texas and Florida readers never meet: the state taxes capital gains as ordinary income, and estates that outgrow the exclusion hit the New York estate tax cliff. Here is how the pieces fit. The evergreen rules live in our New York step-up in basis guide.

The Reset

Basis is what the owner paid. At death, IRC Section 1014 resets the basis of inherited property to its fair market value on the date of death, and IRC Section 1223(9) treats the holding period as long-term no matter how quickly the heir sells.

• Decedent's basis in the brownstone: $90,000
• Value at death: $2,100,000
• Heir's new basis: $2,100,000
• Heir sells at $2,150,000: taxable gain is $50,000, not $2,060,000

The New York Layer: Income Tax on What Remains

New York taxes the gain that survives the step-up as ordinary income under Tax Law Section 601, at graduated rates that reach about 10.9% in the top bracket. That makes the step-up worth MORE to a New Yorker than to a Floridian: every dollar of basis reset saves federal capital gains tax plus up to a dime of state tax.

A sale close to the date-of-death value usually leaves little or no gain for either return.

Married Couples: One Half, Not Both

New York is a separate-property state. A couple holding the house as joint tenants or tenants by the entirety gets a step-up on the deceased spouse's half only; the survivor's half keeps its old basis.

• Home bought for $200,000, worth $1,000,000 at the first death
• Decedent's half steps up to $500,000
• Survivor's half keeps its $100,000 basis
• Survivor's total basis: $600,000

Community property states reset both halves at the first death under IRC Section 1014(b)(6). New York couples get the full reset only at the second death, which changes when it makes sense for a surviving spouse to sell.

The Step-Up Meets the Estate Tax Cliff

The step-up and the New York estate tax are separate taxes that pull in opposite directions, and large estates feel both.

• The step-up erases income tax on lifetime appreciation for assets included in the estate.
• The New York estate tax applies when the taxable estate passes the basic exclusion amount ($7,350,000 for deaths in 2026), and the cliff at 105% of the exclusion (about $7,717,500) taxes the WHOLE estate once crossed, from the first dollar.

The planning tension: keeping an appreciated asset in the estate buys the step-up, and it also swells the estate toward the cliff. Families near the threshold should read our New York estate tax guide and talk to a planner before gifting appreciated property away, because a lifetime gift trades the step-up for a carryover basis under IRC Section 1015.

What Does Not Step Up

• Pre-tax retirement accounts. IRAs and 401(k)s pass as income in respect of a decedent; beneficiaries pay ordinary income tax on withdrawals.
• Lifetime gifts. Carryover basis under IRC Section 1015. Deeding the co-op to the kids early forfeits the reset they would have received at death.
• Losses. Property worth less than its basis steps DOWN, and the unrealized loss disappears.

Assets in a revocable living trust DO step up: the trust is included in the taxable estate, so avoiding probate does not cost the reset.

Documenting the New Basis

1. A date-of-death appraisal for real estate, or broker statements for securities.
2. Title records, since the joint-tenancy question decides which half resets.
3. The estate inventory filed with the Surrogate's Court, which doubles as basis evidence.

Executors selling estate real estate can start with selling inherited property in New York.

Frequently Asked Questions

Does New York have a step-up in basis?

Yes. The step-up is federal law under IRC Section 1014 and applies in every state. The heir's basis resets to fair market value at death.

Does New York tax the gain when I sell inherited property?

Yes, on gain above the stepped-up basis, as ordinary income at rates reaching about 10.9% at the top. A sale near date-of-death value usually leaves little taxable gain.

Do married couples get a double step-up in New York?

No. New York is a separate-property state, so jointly owned property steps up only on the deceased owner's share.

Is the step-up the same thing as the New York estate tax?

No. The step-up reduces the heir's future income tax. The estate tax is a separate tax at death, with a cliff at 105% of the exclusion that can tax the whole estate.

Does property in a revocable trust get a step-up in New York?

Yes. Revocable trust assets are included in the taxable estate and receive the same date-of-death reset.

Related Guides

• New York Step-Up in Basis Guide
• New York Estate Tax and the 105% Cliff
• New York Revocable Living Trust
• New York Probate Guide
• Selling Inherited Property in New York

Sources:

• "Internal Revenue Code Section 1014, Basis of Property Acquired from a Decedent," Cornell Law School Legal Information Institute, 2025, https://www.law.cornell.edu/uscode/text/26/1014
• "Internal Revenue Code Section 1015, Basis of Property Acquired by Gifts and Transfers in Trust," Cornell Law School Legal Information Institute, 2025, https://www.law.cornell.edu/uscode/text/26/1015
• "IRS Publication 551, Basis of Assets," Internal Revenue Service, 2025, https://www.irs.gov/publications/p551
• "New York Tax Law Section 601, Imposition of Tax," New York State Senate, 2025, https://www.nysenate.gov/legislation/laws/TAX/601
• "New York Tax Law Section 952, Tax Imposed (Estate Tax)," New York State Senate, 2025, https://www.nysenate.gov/legislation/laws/TAX/952
• "IRS Publication 559, Survivors, Executors, and Administrators," Internal Revenue Service, 2025, https://www.irs.gov/publications/p559

This post explains federal basis rules and the New York layers in plain terms. Brackets, exclusions, and cliff math move with the law and the calendar. Talk to a tax professional about your own numbers.