Kentucky Step-Up in Basis Explained

When you inherit property in Kentucky, 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.

Kentucky adds three twists worth knowing. First, Kentucky is not a no-death-tax state: it still charges an inheritance tax on what a beneficiary receives, so a single inheritance can raise both a death tax now and an income-tax question later. Second, Kentucky 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, Kentucky 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 Kentucky tax that follows a sale, the inheritance tax that sits alongside it, 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 Louisville 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 Kentucky probate guide)
A funded Kentucky revocable living trust
Joint ownership with a right of survivorship spelled out on the deed, 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 Kentucky), 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: Kentucky Is a Separate-Property State

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

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

Share	Original Basis	Value at Death	Basis After Death
Deceased spouse's half	$75,000	$225,000	$225,000 (stepped up)
Surviving spouse's half	$75,000	$225,000	$75,000 (unchanged)
Combined	$150,000	$450,000	$300,000

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 Kentucky 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.

Item	Amount
Fair market value at death (stepped-up basis)	$360,000
Bathroom remodel after inheriting	+$18,000
New furnace and air conditioner	+$9,000
Adjusted basis	$387,000
Sale price	$405,000
Taxable capital gain	$18,000

How Kentucky Taxes the Gain When You Sell

Kentucky starts its income tax from your federal adjusted gross income under KRS 141.019, and its list of state adjustments has no general subtraction for capital gains. So the gain above your stepped-up basis flows into Kentucky income and is taxed at the state's flat rate under KRS 141.020. That rate has been stepping down: 4.5 percent for 2023, 4 percent for 2024 and 2025, and 3.5 percent for tax years beginning in 2026. The step-down runs on annual legislation, so confirm the current-year figure with the Kentucky Department of Revenue before you rely on it.

Kentucky 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. Kentucky would collect about $630 at 3.5 percent, 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.

Kentucky Inheritance Tax Is a Separate Death Tax

Kentucky is not a no-death-tax state, and this is where it parts ways with many of its neighbors. Kentucky levies an inheritance tax on the value each beneficiary receives, measured at the fair cash value on the date of death (KRS 140.010). Who pays turns on the beneficiary's relationship to the person who died. Class A heirs, which include a spouse, parents, children, grandchildren, siblings, and, for deaths on or after January 1, 2026, nieces and nephews, are fully exempt and owe nothing (KRS 140.080). More distant beneficiaries, such as aunts, uncles, in-laws, cousins, friends, and non-exempt organizations, fall into Class B or Class C and are taxed above small exemptions (KRS 140.070).

Keep the two taxes separate in your head. The inheritance tax is a death tax on the value you receive, owed whether or not you ever sell. The step-up in basis is an income tax rule that decides the gain when you do sell. The date-of-death value does double duty: it fixes the inheritance tax on what you inherit and it sets the basis that measures a later capital gain. The step-up does not reduce the inheritance tax, and paying inheritance tax does not raise your basis above the date-of-death value. Kentucky's dormant estate tax adds nothing, since it produces no tax for modern deaths, and the federal estate tax reaches only estates above the federal exclusion, $15 million per person for deaths in 2026. To check whether the federal estate tax could reach an estate, run the numbers in the Kentucky estate tax calculator. For the full class-by-class breakdown, read the guide to the estate tax in Kentucky.

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. Kentucky has no transfer on death deed for real estate, so a house stays out of probate through survivorship titling spelled out on the deed or through a funded living trust, and both reset the same way probate property does. The how to avoid probate in Kentucky 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 in Kentucky for the title and sale process, then verify your basis paperwork before you list.

Frequently Asked Questions

Does Kentucky have a double step-up in basis?

No. Kentucky 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 Kentucky is not one.

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

Yes. Kentucky starts from your federal adjusted gross income and gives long-term capital gains no separate rate, so the gain above your stepped-up basis is taxed at the state's flat income tax rate under KRS 141.020, 3.5 percent for tax years beginning in 2026. Federal capital gains tax applies on top, and the step-up shrinks the gain both governments can reach. Confirm the current-year state rate with the Kentucky Department of Revenue.

Does Kentucky have an inheritance or estate tax?

Yes for inheritance tax, and no for an effective estate tax. Kentucky levies an inheritance tax on the value each beneficiary receives (KRS 140.010). Class A heirs, a spouse, parents, children, grandchildren, siblings, and, for deaths on or after January 1, 2026, nieces and nephews, are exempt and pay nothing, while Class B and Class C beneficiaries such as aunts, uncles, in-laws, cousins, and friends are taxed above small exemptions. Kentucky's estate tax is dormant and produces no tax for modern deaths. The inheritance tax is a death tax on what you receive, separate from the income-tax basis rule this guide covers.

Do retirement accounts get a step-up in Kentucky?

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 Kentucky 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 keeping the property out of probate cost me the step-up in Kentucky?

No. Property that passes at death through a funded revocable trust, a payable-on-death or transfer-on-death account, or survivorship titling still transfers at the owner's death, so the new owner takes it at its date-of-death value under IRC Section 1014. Kentucky has no transfer on death deed for real estate, so a house avoids probate through survivorship titling spelled out on the deed or through a funded trust, and either route keeps the step-up.

Sources:

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
Title: Individual Income Tax. Publisher: Kentucky Department of Revenue. Publication Date: Not listed. URL: https://revenue.ky.gov/Individual/Individual-Income-Tax/Pages/default.aspx
Title: KRS 140.010, Levy of inheritance tax; property affected; when tax attaches. Publisher: Kentucky Legislative Research Commission, Kentucky Revised Statutes. Publication Date: Not listed. URL: https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=28972
Title: KRS 140.070, Inheritance tax rates. Publisher: Kentucky Legislative Research Commission, Kentucky Revised Statutes. Publication Date: 2026. URL: https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=57147
Title: KRS 140.080, Exemptions of inheritable interests. Publisher: Kentucky Legislative Research Commission, Kentucky Revised Statutes. Publication Date: 2026. URL: https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=57148

This guide is general information about the step-up in basis for inherited property in Kentucky, 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.