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Hawaii Step-Up in Basis
Support GuideHawaii22 min read

Hawaii Step-Up in Basis

Hawaii inherited property usually takes a basis equal to its date-of-death value under IRC 1014, which can erase the gain on a sale by the heirs.

By Settled Editorial

Inherited property in Hawaii takes a new cost basis equal to its fair market value on the day the owner died. The rule is federal, at Internal Revenue Code Section 1014(a), and Hawaii adopts it for its own income tax. When an heir later sells a house in Kailua or a brokerage account, capital gains tax reaches only the growth after the death, and Hawaii caps its tax on that gain at 7.25 percent.

Hawaii writes no basis rule of its own. What Hawaii adds is where the number gets recorded, what a nonresident heir's buyer must withhold at closing, how a tenancy by the entirety between reciprocal beneficiaries fits a federal rule written for spouses, and a short-lived community property history that still reaches a few families. We read every Hawaii rule below on September 24, 2026 at the Legislature's statute host, data.capitol.hawaii.gov, with each section's history note, and we read the two 2026 Acts that touch chapter 235 directly from the Legislature's bill files.

What the Step-Up Does

Basis is what the tax system treats as your cost. On a sale you pay capital gains tax on the price minus that basis, so a higher basis means a smaller gain.

A worked case

Your father bought a condominium in Honolulu in 1994 for $165,000. At his death in 2026 it is worth $720,000. Had he deeded it to you during his life, you would take his $165,000 cost, called a carryover basis, and a sale at $720,000 would show a $555,000 gain.

Because you inherited it, your basis becomes $720,000. Sell at that price and the gain is zero. Sell eighteen months later at $760,000 and you report $40,000. These figures show the mechanism and are not a computation of anyone's tax.

The federal text

Internal Revenue Code Section 1014(a) gives property acquired from a decedent a basis equal to "the fair market value of the property at the date of the decedent's death." Three alternatives sit beside it: the Section 2032 alternate valuation figure, the Section 2032A special-use figure for qualifying farm and business real property, and the decedent's own basis to the extent of a Section 2031(c) conservation easement exclusion.

The reset runs both ways. An asset worth less at death than the owner paid drops to the lower value, and the loss the owner could have claimed on a lifetime sale disappears.

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Hawaii Income Tax Uses the Same Number

Two Hawaii sections carry the federal step-up into the state return.

HRS 235-59 "Decedents" says the determination of "the income of the estate and of the persons who acquire rights from the decedent or by reason of the decedent's death, shall be governed by the Internal Revenue Code." That sentence dates from 1957 and has never been amended.

HRS 235-2.3 "Conformance to the federal Internal Revenue Code; general application" defines the Code Hawaii adopts and lists, in subsection (b), the federal provisions that are not operative in Hawaii. Section 1014, and subchapter O of the Code where it sits, are not on that list. The compiled text on the statute host still adopts the Code "as amended as of December 31, 2024." That text is a year behind: 2026 Act 35 (HB2329, signed May 26, 2026), section 2, changed the date to December 31, 2025 for taxable years beginning after December 31, 2025. Neither version touches the basis rule.

So the stepped-up basis you report to the IRS is the basis you report to the Hawaii Department of Taxation. Nobody computes a second one.

The 7.25 percent ceiling on capital gain

HRS 235-51 sets the individual income tax brackets, and subsection (f) adds a ceiling for gains. Where a taxpayer has a net capital gain, the tax "shall not exceed" the tax at ordinary rates on the greater of taxable income minus the net capital gain, or the income taxed below 7.25 percent, plus "a tax of 7.25 per cent" on the rest. The subsection applies "to individuals, estates, and trusts." In plain terms, Hawaii taxes a long-term gain at no more than 7.25 percent.

2026 Act 24 (SB3125, signed May 21, 2026) amended the individual brackets in HRS 235-51(a), (b) and (c). Its section 2 names only those three subsections, so subsection (f) stands as compiled. We read the enrolled bill to confirm it rather than rely on its description.

The Inventory Is Where Hawaii Records the Value

The step-up is worth only as much as your proof of the figure, and Hawaii's probate code hands you a place to write it down.

HRS 560:3-706 gives a personal representative three months after appointment to prepare "and file or mail" an inventory of what the decedent owned at death, "indicating as to each listed item, its fair market value as of the date of the decedent's death, and the type and amount of any encumbrance." Filing with the court is optional in Hawaii: the section says the personal representative "may also file the original of the inventory with the court," and must send a copy to any interested person who asks. If you expect to inherit something you will sell, ask for that copy.

HRS 560:3-707 lets the personal representative "employ a qualified and disinterested appraiser" for any asset whose value "may be subject to reasonable doubt," and puts the appraiser's name and address on the inventory beside the item. HRS 560:3-708 requires a supplementary inventory when property turns up later or a listed value proves "erroneous or misleading." Hawaii executor duties covers the rest of the job, and the Hawaii probate timeline shows where the three-month inventory sits against the creditor period.

What to gather, by asset

  • A house, condominium or lot. A written appraisal as of the date of death. A county real property tax assessment is a property tax figure, not a date-of-death market value, and it is the weakest paper you can put in the file.
  • Listed stocks and bonds. Ask the brokerage for a date-of-death valuation statement. The IRS Instructions for Form 706 use the mean between the highest and lowest quoted selling prices on the valuation date.
  • A business or partnership interest. A written valuation from a qualified appraiser, dated to the death.
  • Vehicles, art, jewelry and collections. Values dated to the death, plus photographs of the items where the owner left them.

When you hire anyone, ask for an opinion of fair market value as of the date of death and ask for that date on the face of the report.

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The Small Estate Affidavit Leaves No Value Behind

HRS 560:3-1201 lets a successor collect personal property by affidavit, without a court, when "the gross value of the decedent's estate in this State does not exceed $100,000," with motor vehicles transferable "regardless of value." The affidavit states that the ceiling is met. It asks for no appraisal and no valuation date, and real property cannot pass through it at all.

That is a good shortcut for a bank account. It is a thin file for a later sale. If a family uses the affidavit and then sells an inherited car, a coin collection or shares two years later, the only dated number anyone wrote down is often the ceiling itself. Buy a dated valuation for anything you expect to sell, even though nobody will ask for it now. The Hawaii small estate routes explain which estates qualify, and how to avoid probate in Hawaii covers the planning side.

The Deed Decides How Much Resets

Federal law, not Hawaii law, decides how much of a jointly held property steps up. Hawaii law decides what kind of ownership you have.

Spouses

HRS 509-2 lets spouses, or reciprocal beneficiaries, convey property to themselves "as tenants by the entirety" without a straw party. Internal Revenue Code Section 2040(b) calls property held by "the decedent and the decedent's spouse" as tenants by the entirety, or as the only two joint tenants with right of survivorship, a qualified joint interest, and includes one half of its value in the gross estate whoever paid for it. One half steps up. The survivor's half keeps its original cost.

Reciprocal beneficiaries

This is the Hawaii-specific trap. HRS 572C-4 makes it a requirement of a valid reciprocal beneficiary relationship that the parties "be legally prohibited from marrying one another." Hawaii lets them hold as tenants by the entirety under HRS 509-2, but Section 2040(b) speaks only of a decedent and the decedent's spouse. Plan on the general rule in Section 2040(a) instead, which includes the whole value in the gross estate except the part shown to have originally belonged to the survivor and not to have come from the decedent for less than full consideration. If the survivor paid for half, only the decedent's share resets. If the decedent paid for all of it, all of it can reset. Keep the purchase records, and confirm the federal treatment with a CPA before a sale.

Other joint owners

A parent and child who hold as joint tenants fall under Section 2040(a) too. A child who contributed nothing toward the purchase sees the full value included in the parent's estate, and the full value becomes the basis.

Transfer on death deeds

HRS 527-12 says that during the owner's life a transfer on death deed does not affect the owner's rights, including "the right to transfer or encumber the subject property," and creates no "legal or equitable interest" in the beneficiary. The owner kept everything until death, so the property is in the gross estate and takes a date-of-death basis under Internal Revenue Code Section 1014(b)(9).

For property registered in the Land Court, HRS 527-13(a)(1) makes a petition noting the death and asking for a new certificate of title a condition of the transfer. That paperwork can take months. It does not move the valuation date, which Section 1014(a)(1) fixes at the date of death, so order the appraisal as of the death rather than as of the new certificate. Hawaii transfer on death deeds covers recording and the Land Court step.

Hawaii Was a Community Property State for Four Years

HRS chapter 510 is titled "Community Property," and that title misleads people. Its revisor's note says Hawaii ran a community property system from 1945 to 1949, created by L 1945, c 273, and that the system was "abolished by L 1949, c 242." Hawaii is a common-law state today. The chapter still matters for basis in two narrow cases.

  • Community property from 1945 to 1949. Part I governs what remains of it, and HRS 510-10 says that at a spouse's death "one-half of the community property shall continue to belong to the survivor."
  • Community property brought from another state. Part II, the Uniform Disposition of Community Property Rights at Death Act, applies under HRS 510-21 to personal property "acquired as or became, and remained, community property under the laws of another jurisdiction," to property traceable to it, and to Hawaii real property bought with it. HRS 510-23 says one half "is the property of the surviving spouse" and one half is the decedent's. HRS 510-22 supplies the presumptions, including that property acquired while domiciled in a community property state is presumed to fall under the Act.

Why it matters: Internal Revenue Code Section 1014(b)(6) gives a new basis to "the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State," if at least half of the whole community interest was in the gross estate. That is the double step-up. A couple who moved to Hawaii from California and kept brokerage accounts traceable to their California earnings may have property that qualifies, and a couple whose savings were always earned in Hawaii after 1949 does not. Tracing decides it, so gather the account history before the first spouse's estate closes. Hawaii surviving spouse rights covers the spouse's other rights.

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What Does Not Step Up

  • Tax-deferred retirement accounts. Internal Revenue Code Section 1014(c) says the section "shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691." A traditional IRA, a 401(k) and unpaid deferred compensation keep their character, and the beneficiary pays ordinary income tax on withdrawals.
  • Property given away during life. A completed gift carries the donor's basis. That is the trade against the step-up, and it is why deeding a family home to a child early so often costs more in tax than it saves.
  • Appreciated property gifted to the decedent within a year of death. Section 1014(e) blocks the round trip: where the donor or the donor's spouse gets the property back, the basis is the decedent's adjusted basis immediately before death.
  • Assets already outside the gross estate. Property in an irrevocable trust in which the decedent kept nothing takes no date-of-death basis, because the death does not bring it into the gross estate.

The Hawaii Estate Tax Is a Different Question

The step-up decides your income tax when you sell. The Hawaii estate tax decides what the estate owes because of the death, and the two are easy to confuse. HRS 236E-6 fixes the Hawaii exclusion at the federal amount under the Code "as amended as of December 21, 2017, as if the decedent died on December 31, 2017," which works out to $5,490,000, far below the $15,000,000 federal exclusion for a 2026 death. So some Hawaii estates owe Hawaii estate tax and file nothing federal. The Hawaii estate tax calculator shows whether a given estate crosses that line.

Two practical points follow. Where a federal estate tax return is filed and the property increased the federal tax, Internal Revenue Code Section 1014(f) says your basis cannot exceed the value finally determined for that tax. And whatever value the personal representative uses on any estate tax return should come from the same date-of-death appraisal you rely on at the sale, so the numbers in the file agree. The Hawaii estate tax guide covers the tax itself.

Selling, and the Rules That Follow the Death

Basis becomes a number only when there is a sale, and selling inherited property in Hawaii covers the transaction.

Withholding for nonresident sellers. HRS 235-68(b) requires the buyer of Hawaii real property to "deduct and withhold a tax equal to 7.25 per cent of the amount realized" when the seller is a nonresident person. That is 7.25 percent of the price, not of the gain. On a $900,000 sale, $65,250 goes to the Department of Taxation at closing whether or not any tax is owed. Three exits matter to heirs. A resident seller signs the affidavit in subsection (d). A resident estate counts as a "resident person" under subsection (a), and HRS 235-1 defines a resident estate as the estate of a resident decedent whose fiduciary a Hawaii court appointed and whose administration is carried on in Hawaii, so a sale by that personal representative can use the same affidavit. And subsection (e) lets a nonresident apply for a withholding certificate with "a calculation and written justification showing that the transferor will not realize any gain." A stepped-up basis is usually that calculation, so start the application with the appraisal in hand well before closing.

Where the gain is taxed. HRS 235-26(a) says "capital gains and losses from sales of real property located in this State are allocable to this State." A mainland heir who sells an inherited Maui house reports any gain to Hawaii even though the heir never lived there.

The holding period is automatic. Internal Revenue Code Section 1223(9) says a person whose basis is determined under Section 1014 and who sells within one year of the death "shall be considered to have held such property for more than 1 year." Long-term treatment, and with it the 7.25 percent Hawaii ceiling on net capital gain, does not depend on how fast the family sells.

The home-sale exclusion usually does not reach an heir. Section 121 excludes gain only where the seller "owned and used" the property as a principal residence for two of the five years before the sale. An heir who never lived there does not qualify. The step-up already removed most of the gain the exclusion would have covered.

The alternate valuation date rarely applies. Section 2032 lets an executor value the gross estate six months after the death, but subsection (c) allows the election only where it lowers both the gross estate and the federal estate and generation-skipping taxes. With a $15,000,000 federal exclusion, few Hawaii estates file a federal return, and no return means no election.

Frequently Asked Questions

Does Hawaii follow the federal step-up in basis?

Yes. HRS 235-59 says the income of the persons who acquire rights from a decedent or by reason of the death is governed by the Internal Revenue Code, and HRS 235-2.3 adopts the Code for Hawaii income tax without switching off Internal Revenue Code Section 1014. For taxable years beginning after December 31, 2025, 2026 Act 35 moved that adoption date to the Code as amended through December 31, 2025. So the date-of-death basis you use on the federal return is the basis you use on the Hawaii return.

What rate does Hawaii charge on a gain from selling inherited property?

No more than 7.25 percent of the net capital gain. HRS 235-51(f) says that when a taxpayer has a net capital gain, the tax cannot exceed the ordinary tax on the rest of the income plus 7.25 percent of the gain, and the subsection applies to individuals, estates and trusts. 2026 Act 24 rewrote the ordinary brackets in subsections (a) through (c) and left subsection (f) alone. With a stepped-up basis the gain on a prompt sale is often small or zero.

I live on the mainland. Will the buyer hold back money when I sell my parent's Hawaii house?

Probably, unless you act first. HRS 235-68(b) requires the buyer to withhold 7.25 percent of the amount realized, not of the gain, when a nonresident sells Hawaii real property. HRS 235-68(e) lets the seller apply to the Department of Taxation for a withholding certificate by showing that no gain will be realized. A stepped-up basis is often exactly that showing, so bring the date-of-death appraisal to escrow early.

Does the house my spouse and I own as tenants by the entirety fully step up?

Usually only half. Internal Revenue Code Section 2040(b) treats property held by a decedent and the decedent's spouse as tenants by the entirety, or as the only two joint tenants with survivorship, as a qualified joint interest and includes one half in the gross estate. The survivor's half keeps its original cost. Hawaii has not been a community property state since 1949, so the full reset that Section 1014(b)(6) gives a community property survivor applies only to community property held under some state's community property laws.

Is the value on the small estate affidavit my basis?

No. HRS 560:3-1201 lets a successor collect personal property by affidavit when the gross value of the decedent's estate in Hawaii does not exceed $100,000, but the affidavit asks for no appraisal and no valuation date. Your basis under Internal Revenue Code Section 1014(a)(1) is fair market value on the date of death, so get a written, dated value for anything you expect to sell even when no inventory is filed.

Do inherited IRAs get a step-up in Hawaii?

No. Internal Revenue Code Section 1014(c) says the basis rule does not apply to property that is a right to receive an item of income in respect of a decedent under section 691. A traditional IRA, a 401(k) and unpaid deferred compensation keep their character, and HRS 235-59 carries the same federal treatment into the Hawaii return.

Related Guides

This page describes Hawaii and federal law broadly rather than advising on one estate. Basis outcomes turn on dates, deeds, domicile and figures that change from family to family, so take yours to a CPA or a Hawaii tax attorney, and confirm withholding questions with the Hawaii Department of Taxation.

Sources:

It is not legal advice.

Information current as of September 24, 2026

Settled Estate is not a law firm, and this content is for informational purposes only and does not constitute legal advice. Probate laws and procedures in Hawaii can change. Consult with a qualified attorney for advice specific to your situation. Full disclaimer.

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