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Illinois Step-Up in Basis Explained
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Illinois Step-Up in Basis Explained

Illinois step-up in basis resets inherited property to its date-of-death value under IRC 1014. Illinois has no inheritance tax, but has its own estate tax.

By Settled Editorial

When you inherit property in Illinois, its tax basis resets to the fair market value on the day the owner died. Federal law does this under Internal Revenue Code Section 1014, and the reset wipes out every dollar of gain that piled up while the owner was alive. Sell shortly after the death and your taxable gain is often close to nothing.

Illinois has no step-up statute of its own, and it does not need one. The state starts its income tax calculation from your federal adjusted gross income under 35 ILCS 5/203, so the federal stepped-up basis carries onto your Illinois return with no separate election and no extra Illinois form. What Illinois does add is a state estate tax that begins at $4,000,000, which is a separate question from basis and catches families who owe nothing federally. To see whether an estate clears that threshold, run it through the Illinois estate tax calculator.

Where the Illinois Step-Up Comes From

Basis is what an owner has invested in an asset, usually the purchase price plus improvements. When the asset sells, capital gains tax applies to the sale price minus that basis.

Section 1014 of the Internal Revenue Code sets the basis of property acquired from a decedent at its fair market value on the date of death. Nothing in Illinois law overrides that figure, and 35 ILCS 5/203 pulls the federal number straight into Illinois base income.

Two federal rules travel with the step-up:

  • Inherited property counts as long-term no matter how briefly you hold it, under Internal Revenue Code Section 1223(9). A sale two months after the death still gets long-term rates.
  • If the estate files a federal Form 706 and elects alternate valuation under Section 2032, the basis is the value six months after death instead. Section 2032(c) allows the election only where it decreases both the value of the gross estate and the combined federal estate and generation-skipping transfer tax, and Section 2032(d) has the executor make it on the federal return. Most Illinois families never reach it.

There is a second version of that election, and it is where the sources stop short. The Illinois Attorney General's estate tax fact sheet says an estate that is not required to file federally may still elect Section 2032 valuation for Illinois purposes, provided the estate satisfies the requirements in the Internal Revenue Code and its regulations "except as modified by Illinois law." Two questions sit inside that sentence and neither source answers them. Section 2032(c) conditions the election on a decrease in federal tax, and no source explains how that test is applied or modified when the estate owes no federal tax at all. And Section 1014(a)(2) keys income tax basis to an election under Section 2032, so whether a valuation used only on an Illinois Form 700 also moves federal basis is not addressed by the Code or by the fact sheet. Do not plan a sale around an Illinois-only alternate valuation without running it past a tax professional.

A Chicago-Area Example

Suppose your father bought a house in Oak Park in 1992 for $95,000. He died in 2026 when it appraised at $525,000.

ScenarioYour basisGain if you sell for $525,000
He deeded the house to you in 2020$95,000 (carryover)$430,000
You inherited it at his death$525,000 (stepped up)$0

The lifetime gift keeps his original basis under Internal Revenue Code Section 1015. The inheritance resets it. That single difference is worth roughly $86,000 in combined federal and Illinois tax on this house at the 15% federal long-term rate, and more where the 20% federal rate or the 3.8% net investment income tax reaches the gain.

What Steps Up and What Does Not

Most capital assets an Illinois decedent owned get the reset:

  • Real estate, including a home, farmland, a condo, or a rental
  • Stocks, bonds, mutual funds, and exchange-traded funds held in a taxable account
  • Interests in a closely held business, including farm equipment and land
  • Artwork, collectibles, and other personal property with real value

Three categories miss out:

  • Retirement accounts. A traditional IRA, a 401(k), and similar tax-deferred accounts are income in respect of a decedent. They keep their pre-tax character, so a beneficiary pays ordinary federal income tax on withdrawals and gets no basis adjustment. Illinois generally subtracts that federally taxed retirement income from base income under 35 ILCS 5/203(a)(2)(F), so the state usually takes nothing further.
  • Property given away during life. A lifetime gift carries the donor's basis forward under Section 1015. Deeding the family home to the kids now trades a future step-up for a present gift.
  • Property you gave the decedent within a year of death. Section 1014(e) blocks the step-up if you gifted appreciated property to someone who died within one year and it came back to you or your spouse. The basis stays where it was.

Illinois Is a Separate-Property State, So Only Half Steps Up

This is the point where national tax articles mislead Illinois readers. Illinois is a common-law, separate-property state. It has no community property system.

Section 1014(b)(6) gives a full double step-up on jointly held assets only to couples living under the community property laws of a state. Illinois couples do not qualify. When the first spouse dies, only that spouse's half of a jointly held asset resets. The survivor's half keeps its original basis.

Illinois married couples and civil union partners commonly hold the family home as tenants by the entirety under 765 ILCS 1005/1c, or as joint tenants with survivorship. Either form passes the property to the survivor outside probate, and either way the step-up reaches half.

Here is a couple who bought a Naperville home for $180,000 and watched it grow to $700,000 by the first death:

HalfBasis before deathValue at deathBasis after death
Deceased spouse's half$90,000$350,000$350,000 (reset)
Surviving spouse's half$90,000$350,000$90,000 (unchanged)
Combined$180,000$700,000$440,000

If the survivor sells for $700,000, the gain is $260,000 rather than the zero a community property state would produce. The federal home-sale exclusion under Section 121 can absorb up to $250,000 of that for a single filer who lived in the home, and Internal Revenue Code Section 121(b)(4) lets a widow or widower who has not remarried by the sale date claim the $500,000 joint amount on a sale within two years of the death, where the couple met the ownership and use tests immediately before the death. The rest is taxable in Illinois at the flat rate below.

Calculating Your New Basis

Step 1: Pin Down the Date-of-Death Value

Get a defensible number and keep the paperwork that supports it.

  • Real estate: Order a written appraisal as of the date of death. An Illinois independent representative is already gathering values for the inventory mailed to interested persons, so ask for the same appraisal.
  • Publicly traded securities: Average the high and low trading prices on the date of death. If the death fell on a weekend or a market holiday, average the trading days on either side.
  • Farm and business interests: Use a professional valuation. Illinois farmland values move enough that a stale figure invites an IRS challenge.
  • Personal property: Appraise anything with real value and document comparable sales for the rest.

Step 2: Add What You Spend After the Death

Capital improvements you make after inheriting raise your basis above the date-of-death figure. A new roof, an addition, replacement windows, a furnace, or drain tile on farmland all count. Ordinary repairs and routine maintenance do not. Save every invoice.

Step 3: Do the Math on the Sale

LineAmount
Fair market value at death$525,000
Kitchen and bath renovation+$42,000
New roof+$16,000
Adjusted basis$583,000
Sale price$612,000
Selling costs and commission-$36,000
Capital gain (loss)-$7,000

Selling costs come off the amount realized, so a sale near the appraised value can land at a small loss on paper. On inherited property held for investment rather than personal use, that loss is generally deductible.

What Illinois Charges When You Sell

Illinois has no separate capital gains rate. It taxes gains at the same flat individual rate as wages: 4.95% under 35 ILCS 5/201. A $50,000 gain on an inherited house costs $2,475 in Illinois income tax, on top of federal tax. One wrinkle: a trust that sells the property pays an added 1.5% personal property replacement tax under 35 ILCS 5/201(c) and (d), for 6.45% in total. A decedent's estate does not.

At the federal level, long-term gains are taxed at 0%, 15%, or 20% depending on your income, and a 3.8% net investment income tax can apply above certain thresholds. The step-up shrinks the number all of those rates are applied to.

If the estate itself sells the property before distributing it, the estate reports the gain on federal Form 1041 and Illinois Form IL-1041, the fiduciary income and replacement tax return. An estate that stays open past the year of death often files both.

The Illinois Estate Tax Is a Separate Problem

Basis is an income tax question. The Illinois estate tax is a transfer tax, and it catches families who owe the federal government nothing.

The Illinois Estate and Generation-Skipping Transfer Tax Act imposes tax on transfers with a tax situs in Illinois under 35 ILCS 405/3. The exclusion built into 35 ILCS 405/2 is $4,000,000 for anyone dying on or after January 1, 2013. That figure has not moved since 2013 and carries no inflation adjustment.

IllinoisFederal
Exclusion for a 2026 death$4,000,000$15,000,000
Indexed for inflationNoYes
Portable to a surviving spouseNoYes
ReturnForm 700, filed with the Attorney GeneralForm 706, filed with the IRS

The Illinois Attorney General administers the tax and treats the $4,000,000 as a taxable threshold rather than a credit. Once an estate's gross value clears $4,000,000 after adding back adjusted taxable gifts, Form 700 is required whether or not the IRS wants a Form 706. Under 35 ILCS 405/6, the Illinois return and payment ride the federal due dates, which puts the deadline nine months after death with the same extensions the federal return allows.

The tax itself is not a flat rate on the amount above $4,000,000. Under 35 ILCS 405/2, Illinois computes it from the state death tax credit as that credit would have been calculated under Internal Revenue Code Section 2011 as it stood on December 31, 2001, recognizing a $4,000,000 exclusion for deaths on or after January 1, 2013. Because of how that graduated credit table interacts with the exclusion, effective rates climb quickly once an estate passes the threshold, so an estate a little over $4,000,000 does not owe a little tax in the way a flat marginal rate would suggest. The Attorney General publishes a calculator that runs the figures.

The $11,000,000 gap between the two exclusions is what stings. An Illinois farm family or a couple holding appreciated Chicago-area real estate can owe a state estate tax while filing nothing federally. Because Illinois does not let a surviving spouse inherit the unused $4,000,000, couples who want to preserve both exclusions use a credit-shelter trust or the Illinois-only QTIP election under 35 ILCS 405/2(b-1), which defers the state tax to the second death. That election is an estate tax tool. Ask a tax advisor how it interacts with basis at the second death before you rely on it.

Building an estate plan that reaches both taxes starts with the same documents covered in the Illinois guide to avoiding probate.

Illinois Charges No Inheritance Tax

An inheritance tax bills the person who receives property. Illinois does not have one. The Illinois Department of Revenue points inheritance and estate tax questions to the Attorney General, and the Attorney General's guidance notes that an Illinois Inheritance Tax Release matters only when the decedent died before January 1, 1983.

So receiving an Illinois inheritance triggers no state tax on its own. Income tax shows up later, and only on gain above your stepped-up basis when you sell.

Avoiding Probate Does Not Cost You the Step-Up

Heirs sometimes worry that skipping probate skips the basis reset. It does not. The step-up follows what the decedent owned at death, not the paperwork route the asset took.

Assets that pass outside Illinois probate and still reset:

  • Real estate transferred by an Illinois transfer on death instrument under the Real Property Transfer on Death Instrument Act, 755 ILCS 27/. The Illinois TODI guide covers how to sign, witness, and record one.
  • Property held in a revocable living trust the decedent could amend
  • The decedent's share of a joint tenancy or a tenancy by the entirety
  • Payable-on-death bank accounts and transfer-on-death brokerage registrations
  • Personal property collected on a small estate affidavit

Property that reaches an heir through probate resets the same way. The Illinois probate process guide walks through letters of office and the independent administration the state uses by default, and the Illinois probate timeline shows where the date-of-death appraisal fits.

The Adjustment Also Runs Downward

Section 1014 sets basis at date-of-death value whether that value went up or down. An asset worth less than the owner paid steps down.

  • Shares bought for $120,000
  • Worth $70,000 on the date of death
  • Heir's basis: $70,000

The $50,000 built-in loss vanishes. Nobody deducts it. When an owner holds an asset with a real paper loss, selling before death keeps the loss usable. That is one of the few situations where selling ahead of a death beats holding.

Records That Protect Your Basis

The IRS can challenge a basis you claim years after the fact, and the burden falls on you. Hold onto:

  • The date-of-death appraisal, signed and dated by the appraiser
  • Brokerage statements showing date-of-death values
  • The estate inventory the representative prepared under Illinois law
  • A business or farm valuation, if one applies
  • Every receipt for improvements you made after inheriting
  • The closing statement from the eventual sale

The Illinois executor duties guide explains who assembles these values during administration and why the representative should share them with every beneficiary.

Frequently Asked Questions

Does Illinois give married couples a double step-up in basis?

No. Illinois is a separate-property state, and the double step-up in Internal Revenue Code Section 1014(b)(6) reaches only couples under the community property laws of a state. When one Illinois spouse dies, only that spouse's half of a jointly held asset resets to date-of-death value. The survivor's half keeps its original basis.

How much Illinois tax do I pay on the gain from an inherited house?

Illinois taxes capital gains at its flat individual rate of 4.95% under 35 ILCS 5/201, with no separate rate for long-term gains. Because the step-up erases pre-death appreciation, a sale close to the appraised date-of-death value usually produces little or no Illinois taxable gain.

Does Illinois have an inheritance tax on what I receive?

No. Illinois has no inheritance tax on beneficiaries. Its only death tax is the state estate tax under 35 ILCS 405/, which the Attorney General administers on estates over $4,000,000. An Illinois Inheritance Tax Release applies only when the decedent died before January 1, 1983.

Do inherited IRAs and 401(k)s get a step-up in Illinois?

No. Tax-deferred retirement accounts are income in respect of a decedent, so they receive no basis adjustment. A beneficiary pays ordinary federal income tax on withdrawals, subject to the federal ten-year distribution rules for most non-spouse beneficiaries. Illinois generally does not stack its own tax on top of that. Under 35 ILCS 5/203(a)(2)(F), amounts included in federal adjusted gross income under Internal Revenue Code Sections 402, 403, and 408 are subtracted from Illinois base income, and Illinois Department of Revenue Publication 120 lists distributions from a qualified employee benefit plan such as a 401(k) and from an IRA among the federally taxed retirement income a taxpayer may subtract.

Does an Illinois transfer on death instrument preserve the step-up?

Yes. Real estate that passes by a TODI under 755 ILCS 27/ is still property acquired from a decedent, so it takes the date-of-death basis under Section 1014. Recording a TODI keeps the property out of probate without giving up the basis reset.

The Illinois estate tax applies to our estate. Does that change our basis?

Generally no. The $4,000,000 Illinois exclusion decides whether Form 700 and a state estate tax bill are due. It does not set income tax basis. Heirs still take the date-of-death fair market value under federal law, even on an estate that owes Illinois estate tax. One question stays open, described earlier on this page: an estate with no federal filing requirement may elect Section 2032 alternate valuation for Illinois purposes, and no source we found says whether that election moves federal income tax basis. Put that one to a tax professional.

Should we deed the family home to the children now?

Deeding property during life hands the children a carryover basis under Section 1015, so the built-in gain follows the house and surfaces when they sell. Holding the property until death delivers the step-up instead. Anyone weighing a lifetime transfer against Medicaid planning or the $4,000,000 Illinois threshold should model both with a tax advisor first.

Related Illinois Guides

This guide is general information about Illinois estates and federal basis rules. It is not legal advice. Tax outcomes turn on facts that vary from one family to the next. Confirm anything that affects your situation with a licensed Illinois attorney or a tax professional.

Sources:

It is not legal advice.

Information current as of July 19, 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 Illinois can change. Consult with a qualified attorney for advice specific to your situation. Full disclaimer.

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