Iowa Step-Up in Basis Explained

When you inherit property in Iowa, the tax basis of that property usually steps up to its fair market value on the date the owner died. Years of appreciation disappear for tax purposes, so you owe capital gains tax only on the increase in value after the date of death. For many Iowa families this is the largest tax break in the whole estate.

Step-up in basis is a federal rule, not an Iowa one. It comes from Internal Revenue Code Section 1014, and Iowa follows it because the state calculates income tax starting from your federal taxable income (Iowa Code section 422.7). Iowa is also a common-law, separate-property state, so it does not give married couples the community-property double step-up that states like California and Texas allow. This guide walks through how the rule works, how to figure your new basis, and how it fits with Iowa's flat income tax, its repealed inheritance tax, and the probate court costs you pay to the clerk of the district court.

What Is Step-Up in Basis?

When someone buys property, they have a "basis" in it, usually 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

Say your father bought a farmhouse near Cedar Rapids in 1992 for $80,000. When he died in 2026, the home was worth $360,000. If he had given you the home while he was alive, you would take his original $80,000 basis, which is called carryover basis. Selling for $360,000 would leave you with $280,000 of taxable capital gain.

How Step-Up Fixes This

Because you inherited the home instead of receiving it as a gift, your basis steps up to the fair market value on the date of death: $360,000. Sell for $360,000 and your gain is $0. Even if you sell a year later for $378,000, your taxable gain is $18,000 rather than $298,000.

The Legal Foundation

The step-up comes from Internal Revenue Code Section 1014, which sets the basis of property acquired from a decedent at its value on the date of death. It reaches property that passes through:

Probate
A revocable living trust
Joint tenancy with right of survivorship, for the decedent's share
A payable-on-death or transfer-on-death account
A beneficiary designation

Inherited property counts as long-term automatically under IRC Section 1223(9), so a sale soon after death still gets long-term rates instead of higher short-term rates.

How Step-Up Works for Iowa Inherited Property

What Qualifies

Almost every capital asset inherited from a decedent receives a step-up:

Real estate, including homes, farmland, and commercial buildings
Stocks, bonds, mutual funds, and ETFs
Farm equipment, grain, and livestock held as assets
Business interests
Collectibles and personal property that hold value

What Does Not Qualify

Some assets do not step up:

Income in respect of a decedent. Traditional IRAs, 401(k)s, and other tax-deferred retirement accounts keep their character. Withdrawals are taxed as ordinary income to the beneficiary.
Property gifted before death. If the owner gave you the property during life, you usually take their original basis under IRC Section 1015 (carryover basis).
Property you gave the decedent within a year of death. If you gave appreciated property to the decedent and it came back to you within one year, no step-up applies under IRC Section 1014(e).

One Step-Up, Not Two

This is the point that trips up Iowa families who read national tax articles. Iowa is a common-law, separate-property state, not a community property state. So the double step-up does not apply here.

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.

In a community property state, the whole asset would step up when the first spouse dies. In Iowa the survivor still carries the built-in gain on their own half until they sell or die.

Here is what that looks like for an Iowa couple whose home cost $160,000 and is worth $560,000 when the first spouse dies:

Half	Original Basis	Value at Death	Basis After Death
Decedent's half	$80,000	$280,000	$280,000 (stepped up)
Survivor's half	$80,000	$280,000	$80,000 (unchanged)
Total	$160,000	$560,000	$360,000

If the survivor later sells for $560,000, the taxable gain is $200,000 rather than the $0 a community property state would allow. The federal home-sale exclusion under Section 121 can still shelter part of that gain if the survivor lived in the home as a main residence.

Calculating Your New Basis

Step 1: Find the Fair Market Value at Death

The date-of-death value becomes your new basis.

Real estate and farmland: Get an appraisal as of the date of death. A farm appraisal should separate the land, buildings, and any growing crops.
Publicly traded stock: Use the average of the high and low trading prices on the date of death. If death fell on a weekend or holiday, average the trading days before and after.
Closely held business or farm entity interests: Get a professional business valuation.
Personal property: Use appraisals for higher-value items and fair market value from comparable sales.

Step 2: Check for the Alternate Valuation Date

If the estate files a federal estate tax return (Form 706), the personal representative may elect the alternate valuation date, which is six months after death, under IRC Section 2032. The election is allowed only when it lowers both the gross estate and the federal estate tax. Because it applies only to estates above the federal exclusion, almost no Iowa estate ever uses it.

Step 3: Add Post-Death Improvements

Capital improvements you make after inheriting raise your basis: a new roof, an addition, a remodeled kitchen, a new HVAC system, drainage tile, or other land improvements. Keep the receipts.

Example Calculation

Item	Amount
Fair market value at death (stepped-up basis)	$360,000
Kitchen remodel you completed	+$28,000
New roof you installed	+$13,000
Adjusted basis	$401,000
Sale price	$425,000
Taxable capital gain	$24,000

Iowa Income Tax on the Gain

Iowa does not have a separate capital gains rate. It taxes a capital gain as part of individual income at a single flat rate of 3.8% for tax years beginning on or after January 1, 2025 (Iowa Code section 422.5(1)(a)). The older graduated-rate section was repealed for those years.

Because Iowa computes net income from your federal taxable income under Iowa Code section 422.7, the stepped-up basis you claim on your federal return carries straight through to your Iowa return. A step-up lowers both your federal and your Iowa tax when you sell inherited property. If an estate earns income during administration, that income may call for an Iowa fiduciary income tax return (Form IA 1041) on top of federal Form 1041.

At the federal level, long-term capital gains are taxed at 0%, 15%, or 20% depending on your income, and an extra 3.8% net investment income tax can apply at higher income levels. The step-up shrinks the gain those rates reach. Selling an inherited Iowa home is often simpler than families expect, and the Iowa guide to selling inherited property walks through clearing title and closing the sale.

Iowa Probate Court Costs Are Not a Tax on Your Basis

Iowa charges no probate tax. When an estate is administered through the district court, the clerk collects court costs equal to two-tenths of one percent (0.2%) of the value of the probate assets listed in the report and inventory (Iowa Code section 633.31(3)). The charge is uniform in all 99 counties.

Nonprobate assets are left out of that 0.2% charge, including joint tenancy property, life insurance and retirement accounts payable to a named beneficiary, payable-on-death and transfer-on-death accounts, and real estate outside Iowa (Iowa Code section 633.31(3)(b)). These court costs are paid to the clerk of the district court. They are not a tax, and they do not change your income-tax basis.

No Iowa Estate or Inheritance Tax

Iowa has no state estate tax, and the Iowa inheritance tax is repealed for deaths on or after January 1, 2025 (Iowa Code section 450.98). For a death before that date, an open estate may still owe inheritance tax at the phased-down rate for the year of death, though spouses, parents, children, grandchildren, and other lineal relatives were exempt even before the repeal. The Iowa federal estate tax guide covers the older inheritance tax and the phase-out in more detail. To check whether estate tax could also apply to the estate, use the Iowa estate tax calculator.

Only the federal estate tax can now apply, and it reaches only estates above the federal estate tax exclusion ($15,000,000 for deaths in 2026), so it touches very few families. In Iowa the step-up is about income tax on future capital gains, not about dodging a state death tax, because the state no longer levies one.

Step-Up vs. Step-Down

The adjustment runs both directions. If property lost value since the owner bought it, the basis steps down to the lower value at death.

Stock purchased for $120,000
Worth $70,000 at death
Heir's basis: $70,000

If the heir sells for $70,000, there is no loss to deduct. The built-in loss disappeared at death. When an asset has a built-in loss, selling it before death can be the better move so the loss stays usable for tax purposes.

Planning Around Iowa's Single Step-Up

Hold Appreciated Assets Until Death

If you own assets that have grown a lot in value, holding them until death lets your heirs receive a step-up. Selling before death triggers capital gains tax that heirs could have skipped.

Do Not Gift Highly Appreciated Property

When you gift property during life, the person who receives it takes your original basis (carryover basis) and the built-in gain follows the asset. For property that has grown a lot, transferring it at death usually leaves a smaller tax bill than gifting it during life. If you want to gift, gift assets with little built-in gain.

A Trust or POD Account Keeps the Step-Up

Property held in an Iowa revocable living trust receives the same step-up as property that passes through probate, and so do payable-on-death and transfer-on-death accounts and other beneficiary designations. You can keep a home or an account out of probate without giving up the basis benefit. The Iowa guide to avoiding probate lays out the full set of tools.

Watch How Married Couples Title Property

Because Iowa gives only a single step-up, how a couple holds title matters for the survivor. If one spouse holds most of the appreciated assets, planning ahead can put more of the built-in gain into the estate that steps up first. An Iowa estate planning attorney can model the titling and any trust options for your family.

Keep the Documents That Prove Your Basis

The IRS can question a claimed basis, so keep the proof: date-of-death appraisals for real estate and farmland, brokerage statements showing date-of-death values, the estate inventory, business valuations, and receipts for any improvements you make after inheriting. Who inherits in the first place can turn on whether there was a will, which the Iowa intestate succession guide explains.

Frequently Asked Questions

Does Iowa have a double step-up in basis?

No. Iowa is a common-law, separate-property state, not a community property state. Under IRC Section 1014 only the decedent's share of jointly owned property steps up to its date-of-death value. The surviving co-owner keeps the original basis on their own share. A double step-up applies only in community property states.

Does Iowa tax the gain when I sell inherited property?

Iowa taxes a capital gain as ordinary income at a flat 3.8% for tax years beginning on or after January 1, 2025 (Iowa Code 422.5). Because Iowa starts from your federal taxable income (Iowa Code 422.7), the stepped-up basis carries over, so a sale near the date-of-death value leaves little or no Iowa gain.

Does Iowa have an estate or inheritance tax?

No. Iowa has no estate tax, and the Iowa inheritance tax is repealed for deaths on or after January 1, 2025 (Iowa Code 450.98). Only the federal estate tax can apply, and it reaches only estates above the federal exclusion.

Do retirement accounts get a step-up in Iowa?

No. Traditional IRAs and 401(k)s are income in respect of a decedent, so they do not receive a basis step-up. A beneficiary owes ordinary income tax on withdrawals.

Do Iowa probate court costs change my basis?

No. Iowa charges court costs of two-tenths of one percent (0.2%) of the probate assets listed in the report and inventory (Iowa Code 633.31). Those are court costs paid to the clerk of the district court, not a tax, and they do not change your income-tax basis.

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

A lifetime gift takes 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.

This guide is general information about Iowa taxes and estates. It is not legal advice. Basis and tax outcomes turn on your own facts, and farm, business, and trust interests get more involved fast. Confirm your basis with a tax professional, and talk to a licensed Iowa attorney about your situation. For your full set of tasks, start at the Iowa probate hub.

Sources:

Title: Iowa Code section 450.98, inheritance tax repealed for deaths on or after January 1, 2025. Publisher: Iowa Legislature. Publication Date: Iowa Code 2026, accessed 2026-07-15. URL: https://www.legis.iowa.gov/docs/code/450.98.pdf
Title: Iowa Code section 422.5, individual income tax imposed at a flat 3.8%. Publisher: Iowa Legislature. Publication Date: Iowa Code 2026, accessed 2026-07-15. URL: https://www.legis.iowa.gov/docs/code/422.5.pdf
Title: Iowa Code section 422.7, net income computed from federal taxable income. Publisher: Iowa Legislature. Publication Date: Iowa Code 2026, accessed 2026-07-15. URL: https://www.legis.iowa.gov/docs/code/422.7.pdf
Title: Iowa Code section 633.31, court costs in probate equal to 0.2% of probate assets. Publisher: Iowa Legislature. Publication Date: Iowa Code 2026, accessed 2026-07-15. URL: https://www.legis.iowa.gov/docs/code/633.31.pdf
Title: 26 U.S.C. 1014, Basis of property acquired from a decedent. Publisher: Legal Information Institute, Cornell Law School. 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
Title: Estate Tax. Publisher: Internal Revenue Service. Publication Date: Not listed. URL: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

It is not legal advice.