Indiana Step-Up in Basis Explained

When you inherit property in Indiana, its tax basis usually resets to the fair market value on the date the owner died. Federal law calls this the step-up in basis, and it comes from Internal Revenue Code Section 1014. Years of appreciation drop out of the tax picture before you ever sell.

Indiana adds three twists worth knowing. First, the state has no inheritance tax for deaths after December 31, 2012, so the basis rules, not a death tax, decide what tax your inheritance produces later. Second, Indiana is a separate-property state, so a married couple gets a step-up on the deceased spouse's share only, never the community-property double step-up. Third, when you sell for more than the stepped-up basis, Indiana taxes the gain as ordinary income at its flat rate, with no lower state rate for long-term gains. This guide covers the federal rule, the Indiana tax that follows a sale, and the records that protect your new basis.

What Is Step-Up in Basis?

Basis is the number the IRS measures your profit against when you sell an asset. Buy a rental for $120,000 and sell it for $200,000, and your taxable gain is $80,000. Inheritance changes the starting number.

Say your mother bought a house in Indianapolis in 1992 for $95,000, and it was worth $360,000 when she died in 2026. If she had deeded the house to you as a gift during her life, her $95,000 basis would have traveled with it, and a $360,000 sale would produce $265,000 of taxable gain. Because you inherited the house instead, your basis steps up to $360,000. Sell at that price and the taxable gain is zero. Sell two years later for $380,000 and the gain is $20,000, not $285,000.

Section 1014 sets the basis of property acquired from a decedent at its fair market value on the date of death. The reset reaches property that passes through:

• Probate under a will or by intestacy (see the Indiana probate guide)
• A funded Indiana revocable living trust
• An Indiana transfer on death deed recorded under IC 32-17-14
• Joint ownership with survivorship rights, for the decedent's share
• Payable-on-death and transfer-on-death designations on bank and brokerage accounts

The tax code also treats inherited property as held long term under IRC Section 1223(9), so even a sale weeks after death is taxed at federal long-term rates instead of the higher short-term ones.

What Steps Up and What Does Not

Most capital assets reset at death: houses, farmland (a common inherited asset across Indiana), stocks, mutual funds, business interests, collectibles, and other property with market value.

Three groups miss out:

• Retirement accounts. Traditional IRAs, 401(k)s, and similar tax-deferred accounts are income in respect of a decedent. Withdrawals are ordinary income to the beneficiary, with no basis reset.
• Lifetime gifts. Property the decedent gave away during life carries its original basis to the recipient under IRC Section 1015.
• Round-trip gifts near death. If you gave the decedent appreciated property within one year of death and it came back to you, IRC Section 1014(e) denies the step-up.

One Step-Up, Not Two: Indiana Is a Separate-Property State

National articles about the "double step-up" trip up a lot of Indiana families. That rule belongs to community property states such as Texas and California, where the entire marital asset resets when the first spouse dies. Indiana follows separate-property law, so only the deceased spouse's share steps up.

Here is what that looks like for an Indiana couple whose home cost $150,000 and is worth $450,000 when the first spouse dies:

If the survivor sells for $450,000, the federal gain is $150,000. The home-sale exclusion under IRC Section 121 can shelter up to $250,000 of gain for a survivor who lived in the home as a main residence, so in this range the sale often stays tax-free anyway. The math matters more for farms, rentals, and second homes, which get no Section 121 shelter.

Calculating Your New Basis

Let's break it down into three steps.

Step 1: Pin down fair market value at death. For real estate, order an appraisal as of the date of death; the inventory the personal representative files with the court may already carry a value. For publicly traded stock, average the high and low trading prices on the date of death. For a closely held business, get a professional valuation. Save every one of these documents.

Step 2: Check the alternate valuation date. An executor who files a federal estate tax return (Form 706) can elect to value everything six months after death under IRC Section 2032, but only when the election lowers both the gross estate and the estate tax. The election exists for estates above the federal exclusion, so almost no Indiana estate uses it.

Step 3: Add what you spend after inheriting. Capital improvements raise your basis: a remodel, an addition, a new roof, a new furnace. Keep the receipts.

How Indiana Taxes the Gain When You Sell

Indiana starts its income tax at your federal adjusted gross income under IC 6-3-1-3.5, and its list of state modifications has no general subtraction for capital gains. So the gain above your stepped-up basis flows straight into Indiana income and is taxed at the flat rate set by IC 6-3-2-1: 2.95 percent for taxable years beginning in 2026, dropping to 2.9 percent for 2027 through 2029. Indiana counties add a local income tax on the same base at rates that vary by county (IC 6-3.6).

Indiana gives long-term gains no discount. The federal government does: long-term rates run 0, 15, or 20 percent depending on your income, and a 3.8 percent net investment income tax can stack on top at higher incomes.

Run the numbers on the $18,000 gain above. Indiana would collect about $531 at 2.95 percent plus the county share, and the federal bill at a 15 percent rate would be $2,700. Without the step-up, the same sale measured against the original $95,000 basis would have produced a gain more than fifteen times larger. The step-up, not any special exemption, is what keeps the tax small.

No Indiana Inheritance Tax for Deaths After 2012

Indiana once collected an inheritance tax, and stale articles still frighten heirs with it. The tax does not apply to a property interest transferred by a decedent whose death occurs after December 31, 2012 (IC 6-4.1-1-0.5), and Indiana has no estate tax. Only the federal estate tax can apply, and it reaches only estates above the federal exclusion, $15 million per person for deaths in 2026. For the full no-death-tax answer, read the guide to the estate tax in Indiana.

For basis purposes, the point is this: in Indiana the step-up is about the income tax you pay when you sell, not about any state death tax, because the state levies none. To check whether the federal estate tax could reach an estate, run the numbers in the Indiana estate tax calculator.

Step-Up Can Also Be Step-Down

The reset runs both directions. Property worth less at death than the decedent paid takes the lower value as its basis. Stock bought for $90,000 and worth $60,000 at death gives the heir a $60,000 basis, and the $30,000 built-in loss disappears for good. When an asset carries a built-in loss, selling it before death keeps the loss usable on the owner's own return.

Protecting the Step-Up

A few habits preserve the benefit:

• Hold appreciated assets until death when the plan allows it. Heirs receive the reset; a lifetime sale locks in the gain.
• Do not gift a highly appreciated house or farm during life. Carryover basis hands the built-in gain to the recipient. Gift cash or low-gain assets instead, and confirm the choice with a tax professional first.
• Avoiding probate does not cost you the step-up. Property passing by a transfer on death deed or through a funded living trust resets the same way probate property does. The how to avoid probate in Indiana guide compares the tools.
• Keep the paper. Save the date-of-death appraisal, the estate inventory, brokerage statements showing date-of-death values, and receipts for improvements. The IRS can question a claimed basis years after the sale.

Next steps: if a sale is coming, start with the guide to selling inherited property for the title and sale process, then verify your basis paperwork before you list.

Frequently Asked Questions

Does Indiana have a double step-up in basis?

No. Indiana is a separate-property state, so under IRC Section 1014 only the deceased owner's share of jointly owned property resets to its date-of-death value. The surviving co-owner's share keeps its original basis. The double step-up belongs to community property states, and Indiana is not one.

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

Yes. Indiana starts its income tax at your federal adjusted gross income (IC 6-3-1-3.5), so the gain above your stepped-up basis lands in Indiana income and is taxed at the flat rate, 2.95 percent for 2026 under IC 6-3-2-1, plus your county's local income tax. Federal capital gains tax applies on top, and the step-up shrinks the gain both governments can reach.

Does Indiana have an inheritance or estate tax?

No. The Indiana inheritance tax does not apply to a property interest transferred by a decedent whose death occurs after December 31, 2012 (IC 6-4.1-1-0.5), and Indiana levies no estate tax. Only the federal estate tax can apply, and it reaches only estates above the federal exclusion.

Do retirement accounts get a step-up in Indiana?

No. Traditional IRAs, 401(k)s, and other tax-deferred accounts are income in respect of a decedent, so they never receive a basis step-up. A beneficiary owes ordinary income tax on withdrawals, in Indiana and federally.

What if I received the property as a gift before death?

A lifetime gift carries the giver's original basis with it under IRC Section 1015. Only property transferred at death takes a fresh date-of-death basis under IRC Section 1014, which is why gifting an appreciated house during life usually costs the family more tax than passing it at death.

Does property that passes by an Indiana transfer on death deed get the step-up?

Yes. A transfer on death deed under IC 32-17-14 moves the real estate outside probate, but the transfer still happens at death, so the beneficiary takes the property at its date-of-death value under IRC Section 1014. Avoiding probate does not cost you the step-up.

Related Indiana Guides

• Estate Tax in Indiana
• Selling Inherited Property in Indiana
• Indiana Transfer on Death Deed
• Indiana Revocable Living Trust
• How to Avoid Probate in Indiana
• Indiana Probate Guide

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Sources:

• Title: Indiana Code 6-3-1-3.5, "Adjusted Gross Income". Publisher: Indiana General Assembly. Publication Date: 2025. URL: https://iga.in.gov/laws/2025/ic/titles/6#6-3-1-3.5
• Title: Indiana Code 6-3-2-1, Imposition of Tax; Tax Rate. Publisher: Indiana General Assembly. Publication Date: 2025. URL: https://iga.in.gov/laws/2025/ic/titles/6#6-3-2-1
• Title: Indiana Code 6-4.1-1-0.5, Applicability of Chapter. Publisher: Indiana General Assembly. Publication Date: 2025. URL: https://iga.in.gov/laws/2025/ic/titles/6#6-4.1-1-0.5
• Title: Indiana Code 32-17-14, Transfer on Death Property Act. Publisher: Indiana General Assembly. Publication Date: 2025. URL: https://iga.in.gov/laws/2025/ic/titles/32#32-17-14
• Title: 26 U.S. Code Section 1014, Basis of Property Acquired From a Decedent. Publisher: Cornell Law School Legal Information Institute. Publication Date: Not listed. URL: https://www.law.cornell.edu/uscode/text/26/1014
• Title: Publication 551, Basis of Assets. Publisher: Internal Revenue Service. Publication Date: Not listed. URL: https://www.irs.gov/publications/p551

This guide is general information about the step-up in basis for inherited property in Indiana, not advice for your own situation. Tax outcomes turn on your numbers and your filing position, so confirm any figure with a tax professional or an estate planning attorney. It is not legal advice.